Bed, Bath & Beyond (BBBY) reported quarterly earnings last week and investors were disappointed with the results. The company delivered revenue of $2.94 billion and eps of $0.67. It missed on revenue by about $70 million. Investors battered the stock, which is now down over 17% post-earnings. I had the following takeaways on the quarter.

Same Store Sales Were A Disappointment

Bed Bath & Beyond’s total revenue fell by 1.7% Y/Y. The revenue miss was disappointing, yet in my opinion, the revenue decline was not earth-shattering. The company been flirting with a decline in revenue for some time now. In the quarter-ended May 2017 revenue growth was flat; if the company had reported about $4 million less revenue then its top line would have fallen Y/Y. The popular narrative has been the shift to online sales has stymied Bed Bath & Beyond and will not subside any time soon. That reality materialized again this quarter, and anyone long BBBY should get used to it. The question remains, “What is Bed Bath & Beyond going to do about it?”

Comparable store sales fell about 2.6%. This metric is important in that it could be a harbinger of how the business will perform in the future. This rate of decline on top of trillions in stimulus from the federal reserve could be disconcerting. Now that the Fed has decided to unwind its balance sheet what happens to housing starts, consumer spending and retail sales? A 2.6% decline in comparable store sales is likely as good as it gets for Bed Bath & Beyond for a while.

Customer-facing digital channels continued strong growth in excess of 20%. The segment has grown by double-digits for the 13% consecutive quarter. Management has not sat on its hands while online retailers have encroached on its territory. The company’s online offerings include everything that it carries in-store and management still looking to increase online SKUs. Bed Bath & Beyond attempts to make its online offerings price competitive. This could lend itself to customers visiting physical locations, yet buying items online if they are cheaper. Such comparison shopping creates a cannibalization of its own sales, and likely squeezes profit margins.

Profit Margins Continue To Decline

Bed Bath & Beyond’s gross margins were 36.4% this quarter, down 100 basis points from the year earlier period. Declining margins amplify the revenue decline, creating a double negative impact on the company’s earnings. On a dollar basis gross margin fell 4.3% Y/Y, outpacing the decline in revenue and comparable store sales. In past the company has had to engage in discounting to drive traffic to the stores. This quarter management vowed to wring more costs out of the business.

Gross margin enhancement initiatives include: partnering with vendors to streamline operational and technological processes, reducing product costs, optimizing store space and rationalizing SKUs. The company must wring costs out of the system in order to offset the deflationary impact of the encroachment of online sales.

SG&A expense of nearly $900 million grew 7.6% Y/Y, also outpacing the decline in revenue. Bed Bath & Beyond must continue to perfect its online sales process in order to give customers a best-in-class online shopping experience. It competes with the best technology companies in the world, and it must constantly invest in technology in order to keep pace. Secondly, the company offers amenities like taking customer orders in-store for its proprietary web-based platform, and allowing customer orders reserved online to be picked up in-store. These attributes are customer-friendly but they also require its bricks-and-mortar cost structure to help facilitate online transactions.

Operating income fell 40% Y/Y. Operating income margin was 5.7%, down from 9.4% in the year earlier period. The company’s omni-channel sales model has kept sales from rapidly eroding, but it has hurt margins and earnings.

Conclusion

Bed, Bath & Beyond continues to run in quicksand. Share buybacks will not help. Through the first six months of the year the company repurchased another $184 million worth of stock, down from $299 million in the year earlier period. BBBY could continue to decline until the slide in operating income subsides.