Bed Bath & Beyond (BBBY) Down Despite Earnings Beat In Q4

Bed Bath & Beyond Inc. (NASDAQ:BBBY) reported better-than-expected fourth-quarter fiscal 2017 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. This marked the company’s second straight quarter of earnings and sales beat.

However, decline in comparable sales (comps) along with lower margins and soft outlook for fiscal 2018 ha hurt the investors’ sentiment. Consequently, shares of the company lost 14.2% in after-market trading on Apr 11. In the last three months, the Zacks Rank #3 (Hold) stock has declined 5.8%, narrower than the industry’s decrease of 11.9%.

Q4 in Detail

Bed Bath & Beyond’s quarterly adjusted earnings of $1.48 per share outpaced the Zacks Consensus Estimate of $1.41. Including the net adverse $10.5 million tax expenses, with respect to the Tax Cuts and Jobs Act of 2017, earnings came in at $1.41. However, the metric declined 19.6% from $1.84 per share in the year-ago quarter.

Net sales of this home-furnishing retailer came in at $3,716.3 million, which grew 5.2% from the prior-year quarter. The reported figure also surpassed the Zacks Consensus Estimate of $3,673 million. The improvement in sales can be attributed to the company’s transformation efforts and other customer-centric initiatives, somewhat offset by soft comps.

Comps dropped 0.6% due to lower number of store transactions, somewhat mitigated by higher average transaction amounts. While comps from customer-facing digital networks improved, comps at stores fell at mid-single digits rate.

Gross profit slipped 0.7% to $1,333.3 million, while gross profit margin contracted 210 basis points (bps) to 35.9%. Lower margin can be attributed to higher net direct-to-customer shipping expenses, lower merchandise margin, rise in coupon expenses on account of increased redemptions, and increase in average coupon amounts. This coupled with a rise in SG&A expenses led the operating profit to decline nearly 21.6% to $337.1 million. Further, the operating profit margin contracted about 310 bps from the prior-year quarter to 9.1%.

Financial Position

Bed Bath & Beyond ended fiscal 2017 with cash and cash equivalents of $346.1 million, long-term debt of $1,492.1 million and total shareholders' equity of roughly $2,888.6 million.

In fiscal 2017, the company generated cash flow of about $859.7 million from operating activities, while deploying nearly $375.8 million toward capital expenditures.

Share Buyback & Dividend

In the fiscal fourth quarter, the company bought back 2 million shares for nearly $45 million, under the current buyback plan of $2.5 billion. As of Mar 3, 2018, Bed Bath & Beyond had shares worth $1.5 billion remaining under its existing program.

Further, the company's board hiked quarterly dividend rate by 6.7% to 16 cents per share compared with the prior payout of 15 cents. The new dividend is payable on Jul 17, 2018 to shareholders with record as of Jun 15.

Store Update

In fiscal 2017, Bed, Bath & Beyond introduced 22 stores, including two stores in the fourth quarter. These two stores included a World Market and a buybuy BABY outlet. Moreover, the company shuttered 16 stores in the same period, including eight closures in the reported quarter. These eight closures comprise three namesake stores and five World Market stores.

As of Mar 3, 2018, the company had 1,552 stores in operation, including 1,017 namesake stores across 50 states, the District of Columbia, Puerto Rico and Canada; 276 stores under the labels World Market, Cost Plus World Market or Cost Plus; 119 buybuy BABY stores; 83 stores under the labels Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!; and 57 stores under Harmon, Harmon Face Values or Face Values names. Additionally, the company’s joint venture partnership operates eight flagship stores in Mexico.

In fiscal 2018, management intends to open about 20 new stores, mainly Buybuy BABY and Cost Plus World Markets. It also expects to shut 40 stores in the same year through natural lease expirations.

Fiscal 2018 Forecasts

Following the solid results in the reported quarter, management issued guidance for fiscal 2018, which unlike fiscal 2017 will have 52 weeks. Further, the company is likely to adopt a new revenue recognition accounting standard in the first quarter, which should have a minimal impact on fiscal 2018 results.

However, fiscal 2018 earnings are likely to be impacted to the tune of 5 cents per share due to the absence of the 53rd week compared with the previous year. The company also expects a clear shift of sales and expenses from the fourth quarter to the third quarter due to the calendar shift. Bed, Bath & Beyond anticipates an earnings shift from the third quarter to the fourth quarter as well.

For fiscal 2018, the company expects consolidated net sales to remain relatively flat to marginally up year over year. Driven by persistent growth in the customer-facing digital channel, the company envisions comps to increase in the low-single digit percentage range.

Furthermore, Bed, Bath & Beyond projects gross margin deleverage in fiscal 2018 mainly owing to continued investment in the customer value proposition and the constant shift to the digital channels. SG&A is estimated to increase on account of investments toward transformation. However, the company expects to witness operating margin decline lower than that in fiscal 2017. Depreciation expenses are anticipated to be in the $315-$325 million range, while net interest expenses are projected to be $75 million. It also expects tax rate in a band of 26-27% for the fiscal.

Considering all these factors, the company envisions fiscal 2018 earnings per share to be in the low-to-mid $2 range. The company delivered adjusted earnings per share of $3.12 in fiscal 2017. In addition, the Zacks Consensus Estimate for fiscal 2018 is pegged at $2.76.

For fiscal 2018, the company projects capital expenditures to lie between $375 million and $425 million.

Key Picks in Retail Space

Macy's, Inc. (NYSE:M) has an expected long-term earnings growth rate of 8.5% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KAR Auction Services, Inc. (NYSE:KAR) , also a Zacks Rank #1 stock, has a long-term earnings growth rate of 11% and an impressive earnings surprise history.

Dollar General Corporation (NYSE:DG) , which carries a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 14.6%.

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