On the surface, Bed Bath & Beyond Inc. (Nasdaq: BBBY) reported some impressive top- and bottom-line third quarter numbers on Thursday. Unfortunately, it didn’t take long for investors and analysts to dig a little bit deeper into BBBY’s earnings report and find guidance that suggests it’s still struggling to adapt to a challenging retail environment.
BBBY stock posted third-quarter earnings per share of 44 cents on revenue of $2.95 billion. Both numbers topped consensus analyst estimates of 37 cents and $2.90 billion.
The company also reported a comparable-store sales decline of 0.3 percent compared to analyst expectations of a 2.4 percent decline.
But while BBBY earnings may have cleared the low bar Wall Street set, they were far from good. Revenue was down 0.3 percent compared to a year ago, and deteriorating margins resulted in a 48.2 percent year-over-year decline in EPS. BBBY stock plummeted more than 11 percent on Thursday morning and is now down 46 percent in 2017.
Morgan Stanley analyst Simeon Gutman says Bed Bath & Beyond’s key metric is gross profit, which was down about 5 percent in the quarter.
“Once a retailer slips into ‘challenged’ territory, characterized by either same-store sales declines or significant gross margin slippage, the most important metric to focus on is gross profit dollar change as it demonstrates the health of the underlying franchise,” Gutman says. “In Q3, it got worse for BBBY, hence the negative 5 percent post-market reaction despite better comps and a 7-cent EPS beat.”
In addition to declining gross profits, Gutman says the company’s full-year guidance implies no better than a 3 percent decline in comparable-store sales in the critical fourth quarter. Morgan Stanley expects an even steeper 4 percent decline.
KeyBanc analyst Bradley Thomas says BBBY stock’s numbers were simply “less bad” than expected, which is no reason to buy the stock.
“We remain supportive of management’s investments in the business, and remain hopeful that it starts to benefit the top line,” Bradley says. “However, in the near term, margins remain…
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