When Bed Bath & Beyond (BBBY) reported its fiscal first quarter earnings after hours yesterday, the stock started out on a high note through the evening. This morning is another story. The stock opened down around 7%. Bed Bath & Beyond continues to be plagued by the question of whether management can revitalize sales growth in a retail industry that continues to suffer from hyper-competition and the ongoing effects of e-commerce.
Through the spring, the company has gone through quite a change in management, with a new CEO (interim for the moment) and new directors on the board who are getting a shot at this one. With new full year expectations at the low end of guidance that was previously provided by the firm, I still don't trust the stock. Comp store sales are continuing to decline, and the company is likely to spend some money in a "transformation".
The First Quarter
Revenues are simply moving in the wrong direction. Comparable store sales declined 6.6% in the fiscal first quarter. Net sales, which are essentially the same thing in BBBY's case, were $2.6 billion. Net sales forecast for the full year are $11.4 billion to $11.7 billion. Going off of the high end of that guidance, it would roughly mark a 3.1% decline in year over year revenues.
Gross profits declined to $887 million vs. $964 million in 2018. Impairments largely devastated operating income, which turned to a loss of $406.8 million vs. operating income of $81.2 million the year prior.
The company had a net loss of $371.1 million, or $2.91 per diluted share, compared to a gain of $0.32 in 2018. These losses stemmed from a $3.03 per diluted share impact from non-cash impairments, as well as severance and shareholder activity. Excluding these, adjusted earnings were $0.12 per diluted share. One wonders how many more impairments this company is going to deal with. They had a large impairment in the fiscal fourth quarter of 2018 as well.
In their fiscal 2019 outlook, BBBY expects earnings of $2.11 to $2.20 per diluted share. This figure excludes impairments, severance and shareholder activity costs; meaning it will be an adjusted figure and not the actual results. The company also noted that these figures fall at the low end of the guidance BBBY had previously provided.
Does BBBY Have the Stuff to Make It?
On paper, Bed Bath & Beyond has the assets to try and make a change. With over $700 in cash/equivalents, they're not going bankrupt tomorrow. However, the balance sheet is losing equity quickly. Year over year, shareholders equity declined almost 29%. Quarter to quarter, equity declined 19.4% to $2.06 billion. This dampens the appeal a bit, as one of the reasons someone might take a chance on the stock is the potential of asset sales.
So what keeps the appeal in Bed Bath & Beyond? It's the dividend. BBBY offers a yield of more than 6%. That's a real big hook that's keeping shareholders in the game. Cash flow remained positive, and overall I don't see them pulling that dividend. They need it to keep investors interested.
As to whether sitting on that dividend will lead to more results down the road, that's a different story. Interim CEO Mary Winston reiterated their four step plan for improving the situation. Overall, I don't see anything revolutionary in their thinking. These priorities included "stabilizing and driving top line growth, resetting the cost structure, optimizing assets, and improving organization structure."
To me, these are the obvious things they need to do, and don't provide much depth. Of course they need to revitalize sales. If comp sales continue to decline, this is pretty much a done deal. Moreover, they need positive GAAP earnings. If losses start to really eat into their cash, or force them to take on debt, the balance sheet is going to deteriorate quickly.
Right now, I think we're just a little premature in the game to get involved with BBBY. The dividend doesn't make up for the volatile swings in the stock price. Who's to say that this will improve in a year? Guidance doesn't give hope that sales will come to life this year. There are so many retail names, that it seems silly to fool around with BBBY.