Bed Bath & Beyond Inc. (BBBY - Analyst Report) began fiscal 2015 on a soft note as it posted lower-than-expected top- and bottom-line results for the first quarter, leading shares of the company to slip 2.6% in yesterday's after-hours trading session.

The company’s overall results faltered a bit due to the negative impact of foreign exchange rate fluctuations, particularly on its Canadian operations. Also, the bottom line was hurt by weak margins.

Bed Bath & Beyond's first-quarter earnings of 93 cents per share remained flat year over year. Also, the figure fell a penny short of the Zacks Consensus Estimate and was within the company’s guidance range of 90–95 cents per share.

Bed Bath & Beyond Inc. - Earnings Surprise | FindTheCompany

Deeper Insight

The home-furnishing retailer’s net sales advanced 3.1% to $2,738.5 million, but missed the Zacks Consensus Estimate of $2,746 million. The year-over-year improvement in the top line was driven by an increase in comparable-store sales (comps), which contributed nearly 70% to growth, along with new store openings.

Comps for the quarter grew 2.2% compared with a 0.4% rise reported last year, and were also within the company's forecast of 2%–3% growth. Comps growth mainly reflected an increase in average transaction amount as well as the number of transactions.

The company stated that comps exclude Linen Holdings and will continue to do so as this business represents non-retail activity.

Gross profit improved to $1,044.1 million, a marginal rise of 1.3% from the comparable year-ago period. However, gross profit margin contracted 70 basis points (bps) to 38.1% 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 5.6% year over year to $770.9 million. As a percentage of sales, the same expanded 60 bps to 28.1% owing to greater technology and advertisement expenses.

Consequently, operating margin contracted about 130 bps to 10% from the prior-year quarter. Operating profit, in dollar terms, descended 9.1% to $273.3 million.

Per analysts, margins were pressurized on account of the company’s greater indulgence in discounts and promotions, to better compete with bigwigs like Amazon.com Inc. (AMZN - Analyst Report).

Financial Position

Bed Bath & Beyond ended the quarter with cash and cash equivalents of $615.2 million, long-term debt of $1,500 million and total shareholders' equity of $2,552.2 million.

During the first quarter, the company generated cash flow of about $154 million from operating activities while deploying $72.4 million toward capital expenditures. Looking ahead, Bed Bath & Beyond plans to incur capital expenditure of approximately $375–$400 million in fiscal 2015.

Also, during the quarter, the company bought back 5.3 million shares for nearly $385 million. As of May 30, 2015, Bed Bath & Beyond had nearly $499 million remaining under its current $2 billion share repurchase program, which it intends to complete by early fiscal 2016.

Store Update

Year to date, Bed Bath & Beyond has introduced 3 Bed Bath & Beyond stores and 2 buybuy BABY stores, while shutting down 1 Cost Plus World Market store. Going forward, the company intends to open a total of 30 new stores in fiscal 2015.

Outlook

Management remains hopeful of its future results, given the company’s solid financial status and inherent strength. Though the company expects the ongoing currency headwinds to linger, it is confident of driving growth on the back of its strategic investments and omnichannel progress.
 
Consequently, Bed Bath & Beyond continues to forecast comps growth in the range of 2%–3% for fiscal 2015 and for the second quarter as well. Further, the company expects net sales growth rate in the second quarter and the remainder of fiscal 2015 to be about 70 bps and 110 bps ahead of the projected comps sales percentage, respectively. The comps guidance for both periods includes nearly 20–30 bps impact from the ongoing currency fluctuations in Canada.

The company projects gross margin to deleverage in both second-quarter and fiscal 2015 primarily due to higher coupon expense and net direct-to-customer shipping expense. SG&A expenses are projected to increase in both the periods due to a rise in technology expenses, higher investments in compensation and benefits, and the non-recurring benefit from the credit card litigation settlement in 2014. Depreciation expense for the fiscal is still expected to increase about $255–$265 million.

Considering all factors, the company anticipates second-quarter earnings per share in the range of $1.18–$1.23. Further, it projects earnings per share growth rate for fiscal 2015 to remain relatively flat or increase in a mid-single digit percentage.

Zacks Rank

Bed Bath & Beyond currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry are Barnes & Noble, Inc. (BKS - Snapshot Report) and Big 5 Sporting Goods Corp. (BGFV - Analyst Report), each carrying a Zacks Rank #2 (Buy).