Send me real-time posts from this site at my email
Motley Fool

Bed Bath & Beyond's Meltdown Has Only Just Begun

Bed Bath & Beyond's (NASDAQ: BBBY) stock recently plunged after the retailer released an unexpected update regarding its fourth-quarter sales. Its comparable-store sales fell 5.4% in December and January, due to lower store traffic, increased promotional activity and markdowns, and inventory management issues. It didn't offer any comps guidance last quarter, but analysts had expected a milder decline of 1.5%.

CEO Mark Tritton, who took the top job last November, admitted that the retailer was "experiencing short-term pain in our efforts to stabilize the business, including the pressures of store traffic trends coupled with our own executional challenges." Tritton noted that its digital sales grew "approximately 20%", but that growth clearly couldn't offset its dismal performance of its brick-and-mortar stores.

Image source: Getty Images.

The company also stated that its gross margin declined about 300 basis points annually, due to promotions and a higher mix of lower-margin digital sales. As a percentage of its revenues, its sales, general, and administrative (SG&A) expenses also rose 390 basis points. Excluding one-time expenses from its sales-leaseback strategy and severance payments for layoffs, its SG&A percentage still rose by 190 basis points.

In short, Bed Bath & Beyond's revenues are declining, its margin-crushing markdowns aren't bringing back enough shoppers, and its operating expenses are rising. Those bright red flags indicate that Bed Bath & Beyond's meltdown has only just begun.

Reviewing Bed Bath & Beyond's problems

Bed Bath & Beyond is struggling with intense competition from Amazon, Walmart, Target, IKEA, and off-price retailers. Poor management decisions -- including acquisitions rooted in nepotism and outsized compensation packages for former CEO Steven Temares -- also eroded investor confidence in the company.

Activist investors eventually ousted Temares last year, and the company's refreshed board hired Tritton, the former chief merchandising officer of Target, as its new CEO. Unfortunately, Bed Bath & Beyond's dismal growth over the past year indicated that turning around the crumbling retailer would be a herculean task.

Metric

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Comps growth

(1.8%)

(1.4%)

(6.6%)

(6.7%)

(8.3%)

Gross margin

33.1%

34.7%

34.5%

26.7%

32.3%

Source: Bed Bath & Beyond quarterly reports.

Tritton immediately focused on clearing out its excess inventories with mass promotions instead of coupons, replacing those products with more appealing ones, expanding its e-commerce ecosystem, and selling roughly half of its real estate portfolio and leasing back the space to cut costs. Tritton also fired six senior executives -- including its chief merchandising officer, chief marketing officer, and chief digital officer -- last December.

Investors cheered those bold moves, and Bed Bath & Beyond stores seemingly gained shoppers with 7.1% comps growth during the five-day holiday shopping week between Thanksgiving and Cyber Monday. Unfortunately, its gloomy update for the fourth quarter indicates that shoppers didn't come back after the holidays.

Why the meltdown has only just started

Bed Bath & Beyond is still in trouble for three simple reasons. First, it's addicted to low-margin and loss-leading strategies.

Image source: Getty Images.

Its membership program, Beyond+, operates at a loss by offering free shipping (with no minimum purchase) and 20% discounts on all purchases for just $29 a year. However, the program only has 1.4 million subscribers -- which pales in comparison to Amazon's base of over 100 million Prime members in the U.S.

Tritton might halt Bed Bath & Beyond's outdated coupon strategy, but offering across-the-board markdowns will still crush its margins. It clearly needs to clear out its excess inventories to make room for better products, but we've seem other struggling retailers like J.C. Penney make similar promises before.

Second, its digital margins are significantly lower than its in-store margins. This indicates that Bed Bath & Beyond's fulfillment model is inefficient, and overhauling it -- as Target and Walmart did over the past few years -- could be costly. Tritton's decision to sell its real estate for $250 million bought it some time, but it's doubtful that it can pull off an aggressive e-commerce expansion before the new leasing expenses kick in and erode its earnings.

Lastly, there simply aren't compelling reasons to shop at Bed Bath & Beyond when Amazon, Walmart, and Target all offer similar products. Its only path forward seems to be steep markdowns -- but even that desperate strategy failed during the fourth quarter.

The key takeaways

I don't think Bed Bath & Beyond is doomed yet, but its fourth-quarter update indicates that things could get much worse in the near term. Investors should avoid this battered stock for now, even though it smells like a value play with a forward P/E of 11 and a forward yield of nearly 5%.

10 stocks we like better than Bed Bath & Beyond
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Bed Bath & Beyond wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of December 1, 2019

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome!!! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue