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Bed Bath & Beyond: What to Expect in Q1

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Analysts’ expectations

Bed Bath & Beyond (BBBY) is scheduled to report its first-quarter earnings after the market closes on July 10. Compared to the first quarter of 2018, analysts expect the company’s revenues and EPS to fall during the first quarter.

Lower revenues

For the first quarter, analysts expect Bed Bath & Beyond to report revenues of $2.58 billion—a fall of 6.3% from $2.75 billion in the first quarter of 2018. Fewer stores and negative SSSG (same-store sales growth) will likely lower the company’s revenues during the first quarter.

By the end of fiscal 2018, Bed Bath & Beyond operated 1,533 stores—a fall of 25 units from 1,557 stores at the end of the first quarter of 2018. The company’s management decided to eliminate less profitable SKUs, modify its price algorithm, and make changes to its free shipment thresholds, which likely hurt its same-store sales during the first quarter.

Bed Bath & Beyond is focusing on product differentiation, front-end optimization, modifying old stores to next-generation stores, and value propositions to drive its sales. In March, the company launched the first of the six new private label home furnishings brands at Bed Bath & Beyond stores. The other private label home furnishings brands are scheduled to be launched throughout 2019 and 2020.

By the end of the fourth quarter of 2018, the company had modified 21 stores to next-generation trials. There’s a greater emphasis on home decor, food and beverage, and health and beauty care products, and improving the sightlines showing collections across merchandising. During the four-week test period, the next-generation stores delivered a greater SSSG, improved margins, and a significant reduction in inventory.

Lower EPS

Analysts expect Bed Bath & Beyond to report an adjusted EPS of $0.08 for the first quarter—a fall of 76.4% from $0.33 in the first quarter of 2018. The company will likely underperform its peers. Williams-Sonoma (WSM) and RH (RH) reported EPS growth of 20.9% and 39.1%, respectively, in the first quarter.

The lower revenues, lower EBIT margin, and higher effective tax rate will likely cause Bed Bath & Beyond’s EPS to fall during the quarter. However, some of the reductions in the EPS will likely be offset by a lower number of shares outstanding due to share repurchases and lower interest expenses.

Analysts expect Bed Bath & Beyond’s EBIT margin to fall from 3.0% to 1.9%. The decline in the gross margin and higher selling, general, and administrative expenses will likely lower the company’s EBIT margin. Bed Bath & Beyond’s continued investment in enhancing its customer value proposition and its ongoing shift to digital channels could increase its expenses and lower its margins.

From the beginning of the second quarter of 2018 until the end of the fourth quarter of 2018, Bed Bath & Beyond repurchased 7.9 million shares for ~$126 million. At the end of fiscal 2018, the company had the authorization to repurchase $1.3 billion shares.

Stock performance

Since Bed Bath & Beyond reported its earnings for the fourth quarter of 2018 on April 10, its stock price has fallen 42.4%. In the fourth quarter, the company reported an adjusted EPS of $1.20, which beat analysts’ expectation of $1.11. Bed Bath & Beyond’s revenues were $3.31 billion, which fell short of analysts’ estimate of $3.33 billion. The company’s SSSG fell 1.4% more than analysts’ forecast of a fall by 1.3%. The lower-than-expected sales led to a fall in the company’s stock price.

Bed Bath & Beyond, which has been facing pressure from activist investors Legion Partners Asset Management, Macellum Advisors, and Ancora Advisors, announced its refreshed board. The company appointed nine new independent directors to the 13-member board. Bed Bath & Beyond’s co-founders, Warren Eisenberg and Leonard Feinstein, retired from the board. They became co-chairmen emeriti. The board changes and Steven Temares stepping down as the CEO on May 13 didn’t impress investors. Bed Bath & Beyond stock continued to fall.

Despite the fall, Bed Bath & Beyond is still trading 1.3% higher YTD (year-to-date) as of July 2. The company has underperformed the broader equity market this year. During the same period, the S&P 500 Index and the SPDR S&P Homebuilders ETF (XHB) have returned 18.6% and 29.2%, respectively. XHB has invested more than 24.5% of its holdings in home improvement and furnishing companies. In comparison, Williams-Sonoma and RH have returned 23.6% and -0.1% YTD, respectively.

Valuation multiple

The decline of 42.4% in Bed Bath & Beyond’s stock price since the announcement of its fourth-quarter earnings caused its valuation multiple to fall. As of July 2, the company was trading at a forward PE ratio of 5.4x compared to 10.8x before the announcement of its fourth-quarter earnings. On the same day, Williams-Sonoma and RH were trading at forward PE ratios of 13.5x and 12.6x, respectively.

On July 2, Bed Bath & Beyond was trading at 5.6x analysts’ 2019 EPS estimate of $1.98 and at 5.0x analysts’ 2020 EPS estimate of $2.22. The company’s EPS is expected to fall 3.4% in 2019 and rise 11.9% in 2020.

Analysts’ recommendations

Analysts favor a “hold” recommendation for Bed Bath & Beyond. Among the 21 analysts that follow the stock, 76.2% recommended a “hold,” 9.5% recommended a “buy,” and 14.3% recommended a “sell.” On average, analysts have given Bed Bath & Beyond a 12-month target price of $17.43, which implies a return potential of 55.9% from its stock price of $11.18 on July 2.

Williams-Sonoma and RH’s stock price have risen since their first-quarter earnings. Read Williams-Sonoma Is Up ~25% since Its Last Earnings: What’s Next? and RH Is Up ~21% since Reporting Its Earnings: Is There More Upside? to learn more.

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