Why Did Bed Bath & Beyond’s Net Margin Decline in Q2 Fiscal 2018?

For fiscal 2018’s second quarter, Bed Bath & Beyond (BBBY) posted a gross margin, EBIT margin, and net margin of 33.7%, 2.7%, and 1.7%, respectively. These margins had been at 36.4%, 6.5%, and 3.7%, respectively in the second quarter of fiscal 2017.

BBBY’s net margins declined due to a lower gross margin, an increase in SG&A (selling, general, and administrative) expenses, and higher D&A (depreciation and amortization) costs—partially offset by a lower effective tax rate.

The increase in coupon expenses, fall in merchandise margin, and rise in net direct-to-customer shipping expenses lowered the company’s gross margins. SG&A expenses increased 0.4% to 31.0% of the total revenue due to an increase in technology-related expenses, management consulting expenses, and advertising costs. The company’s D&A expenses increased from 2.5% to 2.8% of the total revenue.

However, tax reforms in December 2017 lowered the company’s effective rate to 24.3%, compared to 37.0% in the corresponding quarter of the previous year.

For the same period, Williams-Sonoma (WSM) and RH (RH) posted net margins of 5.0% and 8.8%, respectively.

For the next four quarters, analysts expect BBBY to post a gross margin, EBIT margin, and net margin of 34.1%, 3.3%, and 2.1%, respectively. In the corresponding four quarters of the previous year, these margins had been at 35.0%, 4.9%, and 2.9%, respectively.

Next in this series, we’ll look at BBBY’s second-quarter EPS.