Shares of the home-furnishing retailer, Bed Bath & Beyond Inc. (BBBY) fell nearly 7.13% in yesterday's after-hour trading session, after the company announced dismal first-quarter fiscal 2014 results and provided a cautiously optimistic guidance for the second quarter and fiscal 2014.
Bed Bath & Beyond's first-quarter earnings of 93 cents per share came below the Zacks Consensus Estimate of 95 cents per share and only a penny more than the low end of the company’s lowered guidance range of 92-96 cents per share. Moreover, bottom-line results were flat compared with the prior-year quarter. The lower-than-expected earnings performance was attributed to a challenging retail environment, soft sales and increased costs due to the ongoing long-term investments.
The company posted net sales of $2,656.7 million, up 1.7% from the prior-year comparable period but short of the Zacks Consensus Estimate of $2,691.0 million. The company's top-line gained from an increase in comparable store sales (comps) and new store openings.
Comps grew 0.4% for the quarter compared with a 3.4% increase in the year-ago quarter, while it fell below the company's forecast of 1%-2.5%. Comps growth mainly reflected a slight increase in average transaction amount that was partially offset by a marginal decline in the number of transactions.
Based on the soft first quarter results and continued challenges in the retail sector, the company formulated a cautious guidance for the year ahead. The company anticipates sales to increase in the range of 2%-4% for the second quarter while a rise of 4% is projected for fiscal 2014. Comps for the second quarter are expected to rise 1%-3% while for the fiscal it will increase nearly 3%.
The company projects both gross margin and SG&A expense to deleverage in the second quarter as well as full year. The projected decline in gross margin will result from an anticipated rise in coupon expenses, mix shift in products sold to lower margin categories and a rise in direct to customer shipping costs. SG&A expenses are also projected to increase due to rise in technology and depreciation expenses resulting from investments.
Depreciation expense for the full year is expected to increase about $240 million. Interest expense for the year is modeled at $9.2 million. Tax rate for the second quarter as well as fiscal 2014 is expected to be in the mid to high 30s percentage range.
Based on these assumptions, the company is projecting earnings in the range of $1.08—$1.16 per share in the second quarter, while it has retained its forecast of a mid single digit percentage increase in earnings for fiscal 2014.
Quarter in Detail
Gross profit came in at $1,030.9 million, marginally below the comparable year-ago level. However, gross profit margin for the quarter declined 70 basis points (bps) to 38.8% from 39.5% in first-quarter fiscal 2013. Margins suffered a downside mainly due to a rise in coupon expenses stemming from higher redemptions and average coupon amount, an increase in net direct to customer shipping expense and mix shift in products sold to lower margin categories.
Selling, general and administrative (SG&A) expenses increased 2.9% year over year to $730.2 million. As a percentage of sales, it rose 30 bps to 27.5% due to higher technology expenses and related depreciation costs.
Consequently, operating margin contracted about 110 bps to 11.3% from the prior-year quarter. Operating profit, in dollar terms, for the quarter decreased 6.9% to $300.7 million.
Financial Position
Bed Bath & Beyond ended the quarter with cash and cash equivalents of $536.6 million compared with $439.9 million at the end of first-quarter fiscal 2013. Shareholders' equity as of May 31, 2014, stood at $3,894.3 million versus $4,005.1 million as of Jun 1, 2013.
Further, during the quarter, the company generated a cash flow of $186.9 million from operating activities while deploying $67.9 million toward capital expenditure. Looking ahead, Bed Bath & Beyond plans to incur capital expenditure of approximately $350.0 million in fiscal 2014.
During the quarter, the company repurchased nearly 4.2 million of its outstanding shares, valued at about $273.0 million. Therefore, at the quarter-end, Bed Bath & Beyond had nearly $861 million remaining under its share repurchase program of $2.5 billion, authorized in Dec 2012.
Store Update
In the first quarter, Bed Bath & Beyond inaugurated 2 Bed Bath & Beyond stores, 1 buybuy BABY store, 1 Christmas Tree Shops or andThat! Store and 1 Cost Plus World Market store. During the quarter, the company also closed 1 Bed Bath & Beyond store as part of its operations optimization initiative.
As of May 31, 2014, the company operated 1,015 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada; 266 World Market or Cost Plus World Market stores; 78 Christmas Tree Shop or andThat! stores; 91 buybuy BABY stores and 50 stores under the names Harmon or Harmon Face Values, thereby bringing the total store count to 1,500. Additionally, in a joint venture, Bed Bath & Beyond operates 5 stores in Mexico City under its namesake brand.
As a result, the company’s net store space as of May 31, 2014 was 42.7 million square feet, reflecting a growth of 1.2% year over year.
So far in the second quarter, the company has opened 1 Bed Bath & Beyond store, 1 buybuy BABY store and 2 Cost Plus World Market stores. Including these, the company currently operates 1,504 stores.
For fiscal 2014, the company intends to open 22 stores. Additionally, the company believes there is potential to open another 6 stores before the year-end.
Other Stocks to Consider
Bed Bath Beyond currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the retail space include Build-A-Bear Workshop Inc. (BBW), Five Below Inc. (FIVE) and Office Depot Inc. (ODP). Of these, Build-A-Bear sports a Zacks Rank #1 (Strong Buy) while Five Below and Office Depot have a Zacks Rank #2 (Buy).
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