Can Bed Bath & Beyond's (BBBY) Strategies Help Its Revival?

Bed Bath & Beyond Inc. (NASDAQ:BBBY) is committed toward long-term growth that is backed by strategic investments, omni-channel development and enhancement of product assortments through innovation. Further, this leading operator of domestic merchandise and home furnishing stores in the U.S. has a distinct position in the market driven by strong countrywide network as well as strategic efforts to align merchandise with regional climate and demographics.

The company made a solid comeback in fourth-quarter fiscal 2016, after delivering negative earnings and sales surprises for three straight quarters. In the fourth quarter, both top line and bottom line beat estimates, with sales marking a year over year improvement – backed by a rise in comps and non-comp sales. While comps gained from higher average transactions, non-comp sales were fueled by contributions from PMall, One Kings Lane and new stores. (Read More: Bed Bath & Beyond Jumps on Q4 Earnings & Sales Beat)

The company also remains committed to returning value to shareholders through share repurchases. Moreover, the company continually reviews and prioritizes its capital needs, making the right investments to help position itself for long-term success. It mainly allocates its capital expenditures toward new store openings and refurbishment of existing stores, enhancement of information technology, and other important future projects.

However, Bed Bath & Beyond has been reeling under sluggish mall traffic, with increasing shift toward online shopping. This has largely offset the growth in online sales in the past few quarters. Consequently, shares of this Zacks Rank #3 (Hold) stock has declined 19.9% in the past six months, underperforming the Zacks categorized Retail–Miscellaneous/Diversified industry’s fall of 4.6%.

Though the company reported better-than-expected earnings and sales for the fourth quarter of fiscal 2016, earnings per share declined marginally year over year. Coming to comps, while comps from customer-facing digital networks improved more than 20% in the fiscal fourth quarter, comps at stores fell at a low-single digit rate.

Further, gross margin remained pressurized owing to higher direct-to-customer shipping expenses, as well as a rise in coupon costs. The company also witnessed a rise in selling, general and administrative (SG&A) expenses on account of higher payroll and payroll-related expenses, as well as an increase in technology expenses.

The company anticipates these factors to linger as evident from its bleak outlook for fiscal 2017. Furthermore, the company’s exposure in international markets makes it vulnerable to the adverse currency fluctuations, which is a serious threat.

Bottom Line

We remain encouraged by the company’s long-term prospects driven by strategic initiatives, capital allocation strategy and shareholder-friendly moves. However, its near-term view is strained by soft in-store performance and the likely fall in margins.

Investors may consider better-ranked stocks such as Big 5 Sporting Goods Corporation (NASDAQ:BGFV) , Build-A-Bear Workshop, Inc. (NYSE:BBW) and Ulta Beauty, Inc. (NASDAQ:ULTA) .

Big 5 Sporting Goods Corporation flaunts a Zacks Rank #1 (Strong Buy) and has a long term earnings growth rate of 12%. Further, the company has an average earnings surprise of 94.5% in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Build-A-Bear Workshop sports a Zacks Rank #1 and has a long term earnings growth rate of 22.5%. Moreover, the company recorded an average earnings surprise of 67.5% in the trailing four quarters.

Ulta Beauty carrying Zacks Rank #2 (Buy) had an average earnings surprise of 5.7% in the trailing four quarters. The company has a long term earnings growth rate of 19.5%.

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