Bed Bath & Beyond Continues to Fight Uphill Battle
We expect the company to continue to close stores through attrition and continue to invest in its online platform.
Third-quarter results for no-moat Bed Bath & Beyond (BBBY) were largely in line with our expectations. While sales and earnings per share tipped slightly higher than our forecast, at $2.95 billion and $0.44, respectively (versus our implied estimates of $2.91 billion and $0.41), the company maintained its full-year outlook for $3.00 in EPS, which is in line with our prior $2.98 estimate (implying comps that decline at a low-single-digit clip in the fourth quarter). We don’t plan any material change to our $27 fair value estimate and view the shares as slightly undervalued, trading at 7 times our fiscal 2018 tax-adjusted estimate.
While the company continues to focus on the customer, reiterating its priorities on assortment, services and solutions, and the consumer experience, we don’t think these efforts are enough to differentiate Bed Bath from its competitors that are undertaking similar efforts, supporting our no-moat thesis. This renders our long-term prognosis of the business unchanged. We still believe the company is fighting an uphill battle on the brick-and-mortar side of the business, as evidenced by comparable-store sales that declined in the low-single-digit range during the fiscal third quarter. As a result of this ongoing trend, we expect two outcomes: The company will continue to close namesake Bed Bath stores through attrition, and it will continue to invest in its online platform, keeping selling, general, and administrative expenses as percentage of sales elevated over the remainder of our forecast (at around 30% on average) versus historical levels (27% over the past decade). This keeps our operating margins around the level we anticipate in fiscal 2017 (6%) over the remainder of our forecast.
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Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.