Bed Bath and Beyond reported 4Q (ending February) yesterday after market close that were in line with consensus estimates, but were worse than they appeared. Primarily, sales were below expectations, and profitability (operating margin) continues to be pressured. Additionally, management's guidance points to just moderate sales growth and continued margin pressure in 2015. As I detailed in a prior post, Bed Bath & Beyond sales and earnings growth is slowing as competition heats up. Management's heavy share repurchases provide some downside protection, but the deteriorating fundamentals are likely to limit any share price appreciation moving forward.
The Negatives
- 4Q sales came in below management's guidance despite the fact that management was able to give guidance after holiday sales had come in. While management noted that trends were within their guidance prior to some bad weather in February, their forward guidance points to just 2-3% comp growth in 1Q15 and full-year 2015.
- Gross margin declined 77 basis points, essentially in line with the decline in 3Q, despite management's guidance of a slight decline. The anniversary of their shipping threshold change was expected to significantly moderate the gross margin decline, but other factors (such as increased couponing and online shipping expenses) offset that impact. The outlook for gross margin in 2015 is likely worse than investors were expecting.
- Several other SG&A headwinds emerged, including increased worker compensation, and the opening of a customer support center. Bed Bath and Beyond also continues to expect to open a distribution facility in Las Vegas to facilitate online transactions. These headwinds, in addition to their elevated tech investments, point towards continued SG&A deleverage.
- Management guided to earnings growth of flat to mid single digit growth. This is fairly muted, especially when considering that earnings are supported by a significant amount of share repurchases.
- Free cash flow declined by 20% in 2014, and I forecast another 7% decline in 2015. A big factor behind the decline is management's increased capex guidance of $375-400 million (compared to $331 million in 2014).
The Positives
- Bed Bath and Beyond's online metrics continue to move in the right direction. Customers are increasingly using their reserve online, pick up in store functionality, and traffic to their upgraded site is growing. Management is also aggressively expanding its tech, as they expand their online assortment and are rolling out more equipment to employees to facilitate a more dynamic shopping experience for customers.
Bad Weather and Port Issues are Potential Concerns For Other Retailers
Bed Bath and Beyond mentioned three factors that impacted their results in 4Q, which could carry important implications for other retailers as we approach 1Q earnings season.
- Bed Bath and Beyond mentioned that bad weather in late February led to a dropoff in their sales trends. This negative weather impact may have also impacted traffic at other retailers as well.
- The west coast port issues negatively impacted BBBY's container shipments, forcing them to reroute the shipments into other ports. This in turn led to increased transportation costs and margin pressure. For other retailers that rely on the port for shipments, their margins may have also been pressured in 1Q.
- Bed Bath also noted that compensation and benefits would be higher in 2015. With several retailers increasing benefits and compensation for workers, there may be increased pressure for other retailers to follow in their footsteps to maintain competitive wages. This may put additional pressure on retailer margins in 2015.
My updated Bed Bath & Beyond model can be accessed on my site.