bed bath beyond(BBBY -0.40%) shares fell 24% on June 29 after the retailer released a dismal first-quarter earnings report. Sales fell 25% year over year to $1.46 billion, missing analysts’ expectations by $50 million as like-for-like sales plunged 23%.
Net loss increased to $358 million on a GAAP (Generally Accepted Accounting Principles) basis from $51 million. On a non-GAAP basis, the company reported a net loss of $225 million, compared to net income of $5 million a year earlier, and its net loss of $2.83 per share missed analyst estimates by a wide margin $1.44.
Image source: Getty Images.
Bed Bath & Beyond’s huge loss of earnings prompted the board to sack CEO Mark Tritton, who took the helm in November 2019 to turn the ailing wholesaler inside out. Investors initially welcomed Tritton, who previously acted as target(TGT -0.47%) was chief merchandising officer, but turned against him when the company’s growth rates failed to improve.
These developments have made Bed Bath & Beyond a hot topic on Wall Street again. Could this struggling retailer rise from the ashes after losing more than 80% of its market value in the last five years?
What happened to Bed Bath & Beyond?
Prior to Tritton’s arrival, Bed Bath & Beyond were struggling to keep up Amazon (AMZN -2.49%), Walmart (WMT -0.28%), target and IKEA in the developing retail market. Meanwhile, activist investors repeatedly accused the company’s management of neglecting its crowded stores, making bad acquisitions based on nepotism, and enriching family members and top executives with excessive compensation.
Those allegations eventually led the Bath & Beyond board to oust CEO Steven Temares and hire Tritton, who was instrumental in turning Target around, to fix the ailing business. Unfortunately, Tritton barely had time to implement his strategies before the pandemic began.
Bed Bath & Beyond sales declined 7% to $11.16 billion for fiscal 2019 ended February 2020 as comparable-store sales declined 6.9%. Net loss increased to $613 million from $137 million.
How did Tritton try to save Bed Bath & Beyond?
After Tritton took the helm, he fired most of the company’s executives, divested most of its non-core banners (including Christmas Tree Shops, One Kings Lane and Cost Plus World Market) and focused on strengthening its four core banners (Bed Bath & Beyond, BuyBuy BABY, Harmon Face Values and Decorist). Tritton also closed hundreds of underperforming Bed Bath & Beyond stores, cleared its inventory with deep discounts, and expanded its e-commerce ecosystem.
These efforts initially seemed to bear fruit. Reported revenue was still down 17% to $9.23 billion in fiscal 2020 — mostly due to a sharp decline in the first quarter as the company shut down its stores amid the pandemic outbreak — but rose from the second quarter comparable store sales for four consecutive quarters.
Why did these efforts ultimately fail?
Unfortunately, that recovery came to an abrupt halt and Bed Bath & Beyond’s comps began falling again over the next four quarters. Adjusted gross margins also fell below 30% over the past two quarters.
Period | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 |
|---|---|---|---|---|---|
comps growth | 86% | (1%) | (7%) | (12%) | (23%) |
Adjusted gross margin | 34.9% | 34% | 35.9% | 28.8% | 23.8% |
Data source: Bed Bath & Beyond.
It blamed slowing comps growth and falling margins primarily on new COVID-19 variants, supply chain disruptions and inflationary headwinds.
However, many other retailers faced the same challenges but achieved stronger growth. For example, Target’s comps still grew 12.7% in 2021, on top of a 19.3% growth in 2020. Walmart’s US comps grew 6.4% in fiscal 2022, which is this year January ended, and grew by 15% over two years. Amazon’s sales in North America grew 18% in 2021.
As such, competition from better-run retailers still seems to be a major concern for Bed Bath & Beyond, and its aggressive discounting — which depresses its gross margins — isn’t bringing shoppers back to its stores.
Its vague outlook justifies its discount rating
Bed Bath & Beyond didn’t provide a clear guidance for the rest of the year. But during the earnings call, CFO Gustavo Arnal said that its second-quarter comps “continue to trend in negative 20% territory.”
On the plus side, Arnal expects its comps to gradually improve in the second half of fiscal 2022 as it clears its excess inventory. He also expects the company to reduce its full-year capital expenditures by “at least $100 million from $400 million to $300 million.”
For now, independent board member Sue Gove will serve as the company’s interim CEO. During the call, Gove said the company still has “work to do” and “needs to do it fast” and would prioritize streamlining its business with a “back-to-basics mantra” to drive more traffic to its stores .
However, analysts still expect Bed Bath & Beyond’s revenue to fall 9% this year as its net loss per share more than doubles. The stock may look dirt cheap for selling less than once this year, but investors should avoid this battered stock until some green sprouts actually appear.