Shares of the home-furnishing retailer Bed Bath & Beyond Inc. (BBBY) fell 3.5% in yesterday's after-hour trading session, owing to lower-than-expected sales results for third-quarter fiscal 2014.
Bed Bath & Beyond's third-quarter earnings of $1.19 per share were in line with the Zacks Consensus Estimate of $1.19 per share and within the company’s guidance range of $1.17—$1.21 per share. Moreover, bottom-line results improved 6.3% from $1.12 per share reported in the prior-year quarter.
The company’s net sales of $2,943 million for the quarter registered a year-over-year increase of 2.7%. However, it fell short of the Zacks Consensus Estimate of $2,968 million and the company’s own guidance range of 2.8%—3.7%. The company's top-line improved year-over-year due an increase in comparable-store sales (comps) and new store openings. Bed Bath & Beyond revealed that 60% of the top-line growth was contributed by rise in comps while the remaining 40% was contributed by new store openings.
Comps grew 1.7% for the quarter compared with a 1.3% increase reported last year, but were below the company's forecast of 2%—3%. Comps growth from last year mainly reflected an increase in average transaction amount as well as the number of transactions. The company stated that its comps will now include results from the Cost Plus World Market business, which were absent through the first half of fiscal 2014.
Gross profit improved to $1,129 million, a marginal rise of 0.7% from the comparable year-ago period. However, gross profit margin for the quarter contracted 80 basis points (bps) to 38.4% from 39.2% in third-quarter fiscal 2013. Margins suffered a downside 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 3.9% year over year to $776.3 million. As a percentage of sales, it rose 30 bps to 26.4% due to higher technology expenses and related depreciation as well as increased advertising costs.
Consequently, operating margin contracted about 110 bps to 12% from the prior-year quarter. Operating profit, in dollar terms, decreased 5.8% to $352.7 million.
Financial Position
Bed Bath & Beyond ended the quarter with cash and cash equivalents of $1,043.8 million compared with $471.1 million at the end of third-quarter fiscal 2013. Shareholders' equity, as of Nov 29, 2014, stood at $3,189.3 million versus $4,129.8 million, as of Nov 30, 2013.
Further, during the nine months of the fiscal year, the company generated cash flow of $504.2 million from operating activities while deploying $231 million toward capital expenditures. Looking ahead, Bed Bath & Beyond plans to incur capital expenditure of approximately $350 million in fiscal 2014.
In December, the company completed its $1.1 billion accelerated share repurchase program that went live in Jul 2014. Apart from this, as of the third quarter-end, Bed Bath & Beyond had nearly $1.8 billion remaining under its ongoing share repurchase program, which it intends to complete by fiscal 2016.
Store Update
In the third quarter, Bed Bath & Beyond inaugurated four Bed Bath & Beyond stores, one buybuy BABY store and one Cost Plus World Market store, while shutting down two Bed Bath & Beyond stores.
Moreover, on Dec 5, the company has opened its first buybuy BABY store in Edmonton, Canada.
As of Nov 29, 2014, the company operated 1,019 Bed Bath & Beyond stores in all 50 US states, the District of Columbia, Puerto Rico and Canada; 270 World Market or Cost Plus World Market stores; 78 Christmas Tree Shop or andThat! stores; 93 buybuy BABY stores and 50 stores under the names Harmon or Harmon Face Values, thereby bringing the total store count to 1,510. 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 Nov 29, 2014 was 43 million square feet, reflecting a growth of 1.1% year over year.
Including the stores opened to-date, the company remains on track to complete its targeted 22 store openings in fiscal 2014.
Outlook
Based on its year-to-date performance and its expectations for the rest of fourth quarter, Bed Bath & Beyond has slightly adjusted its sales guidance for the fourth quarter and fiscal 2014. Meanwhile, the company retained its forecast for fourth-quarter earnings and raised its projections for the same for fiscal 2014.
The company now anticipates sales growth in the range of 4.4%–5.4% for the fourth quarter compared with a 4.5%–5.5% increase projected earlier. Moreover, it now expects fiscal 2014 sales to grow between 3.4% and 3.6% versus 3.4%–3.9% growth expected earlier.
The company continues to expect comps growth for the fourth quarter in the range of 4%–5%, while it initiated its full year comps guidance, anticipating an increase in the 2.4%–2.7% range.
The company projects gross margin to deleverage slightly in the fourth quarter and deleverage in fiscal 2014, primarily due to higher coupon expense and net direct-to-customer shipping expense. SG&A expenses are projected to slightly increase in both fourth quarter and fiscal 2014, due to a rise in technology and depreciation expenses resulting from ongoing investments. Depreciation expense for the fiscal is expected to increase about $240 million.
Interest expense for the fourth quarter is projected at $20.3 million, while the tax provision for the quarter stands in the mid to high-30s percentage range. Diluted shares outstanding are expected to be nearly 178 million for the fourth quarter and 189 million for the full-year.
Based on these assumptions, the company reiterated its fourth-quarter earnings per share guidance in the range of $1.78–$1.83. However, it raised its earnings per share forecast for fiscal 2014 to $5.05–$5.09 compared with $5.00–$5.08 projected earlier.
Other Stocks to Consider
Bed Bath Beyond currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the miscellaneous/diversified retail space are The Michaels Companies Inc. (MIK), PetSmart Inc. (PETM) and Hibbett Sports Inc. (HIBB). While Michaels Companies and PetSmart sport a Zacks Rank #1 (Strong Buy), Hibbett carries a Zacks Rank #2 (Buy).
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