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Why Bed Bath & Beyond’s Net Margin Fell in the Fourth Quarter

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Fourth-quarter margin

Bed Bath & Beyond’s (BBBY) net margin fell from 5.5% in the fourth quarter of 2017 to 4.8%. The decline in gross margin, higher SG&A (selling, general, and administrative) expenses, and higher interest expenses resulted in a contraction in the company’s net margin for the quarter, which was partially offset by a decline in the effective tax rate.

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During the quarter, the company’s gross margins declined from 35.9% in the corresponding quarter of 2017 to 34.7%. The decline in merchandise margin, an increase in coupon expense, and a rise in BEYOND+ membership lowered the company’s gross margin. The increase in BEYOND+ membership negatively impacted the company’s gross margins by 0.6%.

BBBY’s SG&A expenses increased from 26.8% to 28.2%. The increase in technology-related investments led to an increase in the company’s SG&A expenses, which was partially offset by a decline in payroll and payroll-related costs and lower advertising expenses due to the adoption of the new accounting standard, which shifted the advertising expenses to the third quarter from the fourth quarter. BBBY’s effective tax rate stood at 19.7% compared to 36.2% in the corresponding quarter of 2017.

Peer comparisons

During the comparable quarter, RH (RH) and Williams-Sonoma (WSM) posted net margins of 11.3% and 9.2%, respectively. For 2019, BBBY’s management expects its operating margin to be flat or improve from 2018. During the period, the management expects its gross margin to improve, while its SG&A (selling, general, and administrative) expenses are projected to rise. The management expects its effective tax rate to be at 27% in 2019.

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