Bed Bath & Beyond Inc. (BBBY - Free Report) reported dismal results in second-quarter fiscal 2018, wherein the top and bottom line lagged estimates. The bottom-line figures also declined on a year-over-year basis. In fact, this marked the first earnings and sales miss after three consecutive beats. Consequently, management trimmed its sales and earnings guidance for fiscal 2018.

Following the disappointing results and bleak outlook, shares of this leading home-furnishing retailer plunged nearly 14% in after-market trading on Sep 26. Soft comparable sales (comps) and contraction in gross as well as operating margin has further weighed on investor’s sentiment.

In the past three months, the stock has lost 6% against the industry’s 12.5% rally. Nevertheless, this Zacks Rank #3 (Hold) company remains on track to achieve its long-term financial goals.

Q2 in Detail

Bed Bath & Beyond’s quarterly earnings of 36 cents per share lagged the Zacks Consensus Estimate of 49 cents. The bottom line also plunged 46.3% from the year-ago quarter.

Net sales came in at $2,935 million and remained almost flat with the prior-year quarter number. However, the top line fell short of the Zacks Consensus Estimate of $2,952 million. Comps, which dipped roughly 0.6% in the reported quarter, negatively impacted the top line. This was because in-store sales declined mid-single digits, somewhat offset by robust sales at its customer-facing digital networks.

Bed Bath & Beyond Inc. Price, Consensus and EPS Surprise

Bed Bath & Beyond Inc. Price, Consensus and EPS Surprise | Bed Bath & Beyond Inc. Quote

While gross profit fell 7.5% to $988.6 million, gross profit margin contracted 270 basis points (bps) to 33.7%. Higher net direct-to-customer shipping expenses and rise in coupon expenses on account of increased average coupon amounts resulted in the margin contraction. Decline in merchandise market further led to the downside. Gross margin contraction coupled with a 1.1% rise in SG&A expenses caused the operating profit to plunge nearly 53.3% to $78.9 million. Additionally, operating margin shriveled 300 bps from the prior-year quarter to 2.7%.

Financial Position

Bed Bath & Beyond ended the quarter with cash and cash equivalents of $869.3 million, long-term debt of $1,492.3 million and total shareholders' equity of $2,902.4 million.

At the end of second-quarter fiscal 2018, the company generated cash flow of about $639 million from operating activities while deploying nearly $181.5 million toward capital expenditures.

Share Buyback & Dividend

In the reported quarter, the company bought back 2.1 million shares for nearly $41 million, under the current buyback plan of $2.5 billion. As of Sep 1, 2018, Bed Bath & Beyond had shares worth nearly $1.4 billion remaining under its existing program.

Additionally, the company’s board declared a quarterly cash dividend of 16 cents per share, payable Jan 15, 2019 to shareholders of record as of Dec 14, 2018.

Store Update

In second-quarter fiscal 2018, Bed, Bath & Beyond introduced one flagship and two World Market stores.

As of Sep 1, 2018, the company had 1,560 stores in operation, comprising 1,018 namesake stores across 50 states, the District of Columbia, Puerto Rico and Canada; 281 stores under the labels World Market, Cost Plus World Market or Cost Plus; 121 buybuy BABY stores; 83 stores under the labels Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!; and 57 stores under Harmon, Harmon Face Values or Face Values names. Additionally, the company’s joint venture partnership operates 10 flagship stores in Mexico.

In fiscal 2018, management intends to open about 20 stores, mainly buybuy BABY and Cost Plus World Market. Simultaneously, it expects to shut nearly 40 stores.

Outlook

Following the company’s dull performance in the fiscal second quarter, management lowered its guidance for fiscal 2018, which unlike fiscal 2017 has 52 weeks. The view was slashed due to various factors including the expected impact of the Hurricane Florence, and tariffs on imports from China.

Depending on the planning assumptions, management has marginally cut down its net sales model along with comps projection of relatively flat with fiscal 2017. Earlier, net sales were anticipated to remain relatively flat to marginally up year over year and comps were likely to increase in the low-single digit percentage range.

Net sales are anticipated to increase in the mid-single-digits rate in third-quarter fiscal 2018, while it is estimated to fall in the high-single digits rate in the fourth quarter. The downside can be attributed to the fiscal calendar shift and the loss of the 53rd week. Notably, comps guidance includes contributions from robust gains from customer-facing digital channels.

Bed, Bath & Beyond continues to project gross margin deleverage in fiscal 2018, mainly owing to the investments in the customer value proposition and the constant shift to the digital channels. SG&A is estimated to increase on account of investments toward transformation. However, the company still expects to witness operating margin contraction lower than that in fiscal 2017. Depreciation expenses are anticipated to be in the $320-$330 million range compared with $315-$325 million band expected earlier. Furthermore, it expects tax rate in the band of 25-26% for the fiscal year.

Considering all these factors, the company now envisions fiscal 2018 earnings per share to be at the lower end of its earlier guided range, at about $2.00. Earnings per share were earlier expected to be in the low-to-mid $2 range. In fiscal 2017, Bed, Bath & Beyond delivered adjusted earnings per share of $3.12. The Zacks Consensus Estimate is currently pegged at $2.30 for the fiscal year.

For fiscal 2018, management still projects capital expenditures to lie between $375 million and $425 million.

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