Shares of the home-furnishing retailer Bed Bath & Beyond Inc. BBBY fell 3.2% in yesterday's after-hour trading session as the company reported lower-than-expected sales and earnings results for fourth-quarter fiscal 2014.
Though the company’s overall results reflected year-over-year growth, it somewhat faltered due to the negative impact of foreign exchange rate fluctuations, particularly on its Canadian operations, and the prolonged West Coast port slowdown.
Bed Bath & Beyond's fourth-quarter earnings of $1.80 per share were a penny short of the Zacks Consensus Estimate but within the company’s guidance range of $1.78–$1.83 per share. Moreover, bottom-line results improved 12.5% from $1.60 per share reported in the prior-year quarter.
The company’s net sales of $3,336.6 million for the quarter registered a year-over-year increase of 4.2%. However, sales were below the Zacks Consensus Estimate of $3,366 million and also the company’s guidance range that projected a 4.4%–5.4% increase. The year-over-year improvement in top line was due to an increase in comparable-store sales (comps), which contributed nearly 86% to growth, along with new store openings.
Comps for the quarter grew 3.7% compared with a 1.7% increase reported last year, but were below the company's forecast of 4%–5% growth. Comps growth mainly reflected an increase in average transaction amount as well as the number of transactions.
The company stated that comps for the Cost Plus World Market business are being included in its results since the third quarter of fiscal 2013. However, comps exclude Linen Holdings and will continue to do so as this business represents non-retail activity.
Gross profit improved to $1,325.9 million, a marginal rise of 2.2% from the comparable year-ago period. However, gross profit margin contracted 80 basis points (bps) to 39.7% mainly due to a rise in coupon expenses stemming from higher redemptions and an increase in net direct-to-customer shipping expense, partly offset by a decline in average coupon amount.
Selling, general and administrative (SG&A) expenses increased 3% year over year to $793.7 million. As a percentage of sales, it fell 20 bps to 23.8% due to lower occupancy expenses.
Consequently, operating margin contracted about 50 bps to 15.9% from the prior-year quarter. Operating profit, in dollar terms, rose nearly 1% to $532.2 million.
Financial Position
Bed Bath & Beyond ended fiscal 2014 with cash and cash equivalents of $875.6 million compared with $366.5 million at the end of fiscal 2013. Shareholders' equity, as of Feb 28, 2015, stood at $2,743.2 million versus $3,941.3 million, as of Mar 1, 2014.
During the fiscal, the company generated cash flow of $1,185.8 million from operating activities while deploying $330.6 million toward capital expenditures. Looking ahead, Bed Bath & Beyond plans to incur capital expenditure of approximately $375–$400 million in fiscal 2015.
In the fourth quarter, the company bought back about 11.8 million shares for nearly $947 million. As of Feb 28, 2015, Bed Bath & Beyond had nearly $884 million remaining under its current $2 billion share repurchase program, which it intends to complete by early fiscal 2016.
Store Update
In the fourth quarter, Bed Bath & Beyond inaugurated one Bed Bath & Beyond store, three buybuy BABY stores and one Cost Plus World Market store, while shutting down one Bed Bath & Beyond store and one Cost Plus World Market store.
As of Feb 28, 2015, the company operated 1,019 Bed Bath & Beyond stores in all 50 U.S., the District of Columbia, Puerto Rico and Canada; 270 World Market or Cost Plus World Market stores; 78 Christmas Tree Shop or andThat! stores; 96 buybuy BABY stores, including its first in Canada, and 50 stores under the names Harmon or Harmon Face Values, thereby bringing the total store count to 1,513. 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 Feb 28, 2015 was 43 million square feet, reflecting a growth of 1% year over year.
Outlook
Bed Bath & Beyond forecasts comps growth in the range of 2%–3% for both first quarter and fiscal 2015. Further, the company expects net sales growth rate for the first quarter and fiscal 2015 to be about 70 bps and 90 bps ahead of the projected comps sales percentage, respectively. The comps guidance for both periods includes nearly 20–30 bps impact from the ongoing currency fluctuations in Canada.
The company projects gross margin to deleverage in both first quarter and fiscal 2015, primarily due to higher coupon expense and net direct-to-customer shipping expense. SG&A expenses are projected to increase in both first quarter and fiscal 2015 due to a rise in technology expenses, higher investments in compensation and benefits, and the nonrecurring benefit from the credit card litigation settlement in 2014. Depreciation expense for the fiscal is expected to increase about $255–$265 million.
The company expects first-quarter earnings per share to be in the range of 90–95 cents compared with 93 cents in 2014. Further, it projects earnings per share growth for fiscal 2014 to remain relatively flat or to rise at a mid-single digit percentage.
Other Stocks to Consider
Bed Bath Beyond currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the miscellaneous/diversified retail space are Office Depot Inc. ODP, Tractor Supply Company TSCO and ULTA Salon, Cosmetics & Fragrance Inc. ULTA, all carrying a Zacks Rank #2 (Buy).
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