Profits don't make a splash at Bed Bath & Beyond
Bed Bath & Beyond on Wednesday reported that fourth quarter net sales fell about 11% to $3.3 billion, primarily due to one less week compared to the previous year that sent post-Thanksgiving holiday sales out of the quarter.
Comparable sales in the quarter declined approximately 1.4% and included "strong sales growth" in e-commerce; sales from stores declined in the mid-single-digit percentage range, according to a company press release. The home goods retailer swung to a loss of $253.8 million from a profit of $194 million in the year-ago quarter.
An activist group including Legion Partners Holdings, Macellum Advisors GP and Ancora Advisors that previously called for the retailer to replace CEO Steven Temares and its entire board, said in a letter Wednesday, which was emailed to Retail Dive, that the quarter's results only underscore that need. Under his "direction, the Company has fallen far behind retail peers and the operating deterioration is accelerating," the group wrote. "Despite a rapidly growing e-commerce business, Bed Bath experienced another quarter of declining same-store sales."
Bed Bath & Beyond said that it expects net earnings per diluted share in fiscal 2019 to "grow slightly," but analysts — and the activist group on the retailer's case — took a somewhat dim view of the emphasis on profitability to the extent that hurts the top line.
"The focus remains on the financial outlook, with the company's updated guidance calling for better EPS and profitability, but at the expense of sales growth," Telsey Advisory Group Cristina Fernández wrote in comments emailed to Retail Dive. "Although we are encouraged by the focus on profitability, it is coming with meaningful market share losses and we believe a better balance of sales and earnings growth is needed. Near-term, we believe the involvement of activist investors provides support for the stock."
Wells Fargo analysts are less sanguine. "While shareholder activism often brings hope and the promise of positive change, we believe fundamentals ultimately prevail, and [Bed Bath & Beyond's] Q4 update provides little evidence that an inflection is near, or even possible," Wells Fargo analysts led by Senior Analyst Zachary Fadem wrote in comments emailed to Retail Dive, calling the quarter's results "unsurprisingly poor."
The continuing trends emerging in the current quarter also "cast doubt on the fixability of this business, as we continue to see a secularly challenged retailer with a commoditized assortment, inferior pricing/dependency on coupons, and weak store traffic/comps," Wells Fargo also said. "Considering these factors, we size the prospects of a turnaround as low and not imminent."
GlobalData Retail Managing Director Neil Saunders also called the quarter's performance "poor" and warned that the retailer continues to lose market share. "On this front, one of the main barriers to growing sales is a lack of inspiration and excitement in stores combined with extremely poor merchandising. This is both deterring potential shoppers from visiting and reducing conversion rates and transaction values," he said in comments emailed to Retail Dive. "This has become an especially pressing problem as rivals have expanded and as online has started to play a greater role in home furnishings and home products purchases. Against this more competitive backdrop, Bed Bath & Beyond has not delivered. It has neither the authority and convenience of a player like Amazon, nor the excitement and inspiration of a shop like HomeGoods. It is caught somewhere in the murky middle ground."
In a conference call with analysts on Wednesday, Temares defended the retailer's turnaround, noting its development of private labels and concept stores, which he said are seeing sales superior to others. CFO Robyn D'Elia said the company continues "to manage the business with a bias toward driving profitability improvement over near term sales growth," according to a transcript from Seeking Alpha. D'Elia continued, "As previously described this includes reducing some marketing, raising the Bed Bath & Beyond free shipping threshold, eliminating less profitable SKUs from the assortment, and excluding coupons from certain SKUs."
But that didn't please Legion Partners and its associates in what is emerging as a potential proxy fight. "We were deeply concerned to hear management suggest, during the fourth quarter call, that they were going to reduce coupon availability to improve profitability," the group wrote. "Our proprietary consumer survey work indicates this is a risky path to pursue given the wide range of margin enhancing opportunities available for both reducing product sourcing costs and lowering SG&A in non-customer facing areas. In our view, it does not make sense to make any couponing adjustments prior to executing on initiatives that would fundamentally improve the in-store experience for customers and drive retail traffic."
GlobalData Retail analysts rejected the strong push from the activist shareholders, noting that they don't provide much of a turnaround blueprint, aside from replacing the company's management. "Admittedly, the pace of change is much slower than we would like but we appreciate that investing in store is a costly exercise and, therefore, is one that management wants to get right. As such, prudence is no bad thing," Saunders wrote. "We broadly reject the calls of activist investors for a wholesale change of management, if only because this will not solve any of the issues unless accompanied by a clear new vision and plan — something no activist investor has yet put forward."
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