More Bad News for Bed Bath & Beyond
Quarterly results indicate the turnaround remains stalled with no catalyst to drive earnings in sight.
Bed Bath (BBBY) has succumbed to further gross margin pressure in its second quarter, leading to another reduction in its full-year earnings per share outlook, to around $2.00, from the low to mid-$2 range (and down 6% at the initial midpoint of guidance, or $2.93). The firm’s consistent inability to manage margin has sent shares tumbling, as results indicate the turnaround remains stalled, and the promise to achieve EPS growth in 2020 offers nearly no insight to a near-term catalyst in shares (although gross margin stabilization would certainly help, in our opinion).
While Bed Bath attempts to pivot to better accommodate its customer base, adding options like Beyond-Plus ($29 for 20% off purchase plus free shipping, with around 1 million members expected by year end) and reinvigorating its website (with digital representing more than 10% of sales), we don’t think such efforts are enough to either differentiate the company’s business model or restore operating margin performance to historic double-digit levels, leading to mid-single-digit ROICs that are well below our 9% weighted average cost of capital estimate, which supports our no-moat rating. We don’t plan to make any material change to our $17.50 fair value and view shares as fairly valued, trading at 8 times the firm’s updated 2018 EPS estimate versus our average 4% EPS decline forecast over the next five years.
Bed Bath continued to lose share of the home furnishing market, growing at a flat pace in the first half of its fiscal year versus a market that increased 5%. Our long-term outlook forecasts the firm ceding share over the next decade with expected sales declines of 2% on average hindered by accelerating store closures as leases come due (the firm expects 40 closures this year, offset by 20 openings). A languishing top-line should precipitate difficulty in leveraging the cost structure and thus the operating margin, which we have reaching back to around 5% over our forecast from an estimated 4% in 2018.
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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.
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