Bed Bath & Beyond (BBBY) shares jumped nearly 17% to $14.29 on Thursday. The jump was a result of some new guidance numbers for earnings that came with their fiscal third quarter results. Personally, I don't think the information provided warrants an investment.
BBBY is fighting was seems to be a slow, losing battle. The short answer for BBBY's big stock jump is simple. The stock is incredibly cheap. Thanks to that extremely low valuation, the company's announcement of relatively unchanged earnings guidance between fiscal 2018 and fiscal 2019 was able to drive the stock on a big run on the news. I see one problem here. The guidance of around $2 a share in earnings really doesn't seem like enough to create the environment for a big bull run.
If their guidance is mildly accurate, it will not be enough to drive this stock. Retailers are trading at notoriously low multiples as they compete with the onslaught of competition. Stagnant earnings growth year over year will not be enough to derive any real momentum for Bed Bath & Beyond. I see very little reason to own the name.
Net sales for the quarter increased 2.6% to $3.03 billion. That's not the worst sales growth in retail right now, but it didn't necessarily come in the healthiest way. Comparable sales declined 1.8%, meaning the net growth resulted from new sales avenues that compensated for a weakening in the established business. For the first nine months, revenues are up roughly 1% to $8.72 billion. The company cited some growth in digital avenues, while store sales declined in the single digits. The sales don't do enough for me. The income statement shows those sales gains are becoming more and more expensive to produce. The trends in gross and operating profits are not promising.
Gross profits decreased by 0.96% in the third quarter to just over $1 billion. For the first nine months of the fiscal year, gross profits are down 4.8% to $2.95 billion. Operating income was even worse; decreasing 54.3% in the third quarter to $49.5 million. For the first nine months, operating income is down by more than half to $209.6 million. SG&A expenses are simply not being curtailed in the face of declining grosses. Honestly the biggest saving grace to BBBY this year has been lower income taxes.
Earnings before taxes fell to $26.8 million in the third quarter. Very low tax provisions allowed most of this to translate to earnings. BBBY reported net earnings of $24.35 million; a roughly 60% decline year over year. Diluted earnings per share decreased 59% to $0.18. For the first three quarters, net earnings are down around 50%, while diluted earnings are down a comparable 50% to $0.86 a share. These are not numbers that should be invoking stock price appreciation. The only reason the stock is up is because it was so unbelievably cheap prior to the report. It still is for that matter.
Guidance has the company finishing fiscal 2018 with around $2 a share in earnings. The earnings release further stated that the company expects fiscal 2019 earnings to be in the same range. Obviously that is a long way off. Market conditions could very well shift in that time frame. But if their guidance is mildly accurate, that means that BBBY stock is trading at just under 7x full year earnings for fiscal 2018 as well as 2019. If Bed Bath and Beyond is only trading at these multiples now, when $2 a share seems pretty clear, why would the market have a lot of incentive to run the stock up if 2019 is not promising any earnings growth? Of course, the catch here is management could be playing it incredibly conservative in order for any surprises to be ever more meaningful down the road. I don't see it though. There are problems here that are being held off, rather than really fixed. I think retail is such a brutal environment right now that it's foolish to consider making a play on the weak competitors.