Shares of retail giant Bed Bath and Beyond (NASDAQ: BBBY) has fallen over 27% in the last five trading sessions. The company announced its fiscal second quarter of 2022 results last week and reported revenue of $1.99 billion and adjusted earnings of $0.52 per share. It missed consensus revenue estimates by $70 million while Wall Street expected Bed Bath & Beyond’s adjusted earnings at $0.52 per share in Q2. Further, it also reported a GAAP net loss of $0.72 per share in the quarter ended in August.
During its last earnings call in June, Bed Bath & Beyond has issued a lackluster guidance for Q2. After adjusting for divestitures, it had estimated total sales to decline in Q2 compared to the same period in 2019. Alternatively, the demand for home furnishing products in this period has seen sales rise by a robust 20% year over year. BBBY had also initially forecast adjusted Q2 earnings between $0.48 and $0.55 per share.
While total sales fell 26% year over year in Q2, around 15 percentage points can be attributed to divesture of its non-core businesses that includes Christmas Tree Shops and Cost Plus World Market.
The company’s operating cash flow was $75 million but its capital expenditures stood at $76 million which meant free cash flow was neutral.
More pain ahead for BBBY stock?
Bed Bath & Beyond’s sales were down 6% year over year in fiscal Q1 compared to the same period in 2019. In Q2, comparable store sales declined by 1% while its core retail banners experienced a 11% fall in top-line. The surge in COVID-19 cases in several U.S. states also hit in-store footfall in the last month of Q2.
Rising freight costs and supply-chain issues have hurt the company’s profit margins and are likely to impact the bottom-line going forward. Its adjusted gross margin of 34% was below management’s midpoint guidance of 35.5% for Q2. If we include the markdown’s on older inventory its GAAP gross margin was lower at just 30.3%.
Bed Bath & Beyond management warned that macro-economic challenges have not abated in September and explained, “We're exercising caution on the near-term pressures related to rising cost inflation and the ongoing tightening of supply availability….We're still projecting some sequential increase in freight costs as we go from Q2 to Q3.”
Bed Bath & Beyond may continue to underperform
Bed Bath & Beyond like most other companies claims that GAAP metrics such as re-structuring and impairments are non-recurring in nature. However, the company has reported over $1 billion dollars in write-offs and impairments in the last few years.
In Q3 the company expects sales between $1.96 billion and $2 billion, compared to prior-year sales of $2.61 billion. Analysts on the other hand forecast Q3 sales at $2 billion. Wall Street expects sales to decline by 10.4% year over year to $8.27 billion in fiscal 2022 and to remain flat year over year in 2023.
Bed Bath and Beyond is valued at a market cap of $1.6 billion indicating a forward price to sales multiple of just 0.17x making it one of the cheapest stocks even among peers. It ended the August quarter with $1 billion in cash and $3.14 billion in debt, which shows it has enough liquidity to tide over the near-term tailwinds.
But the company will continue to be negatively impacted as the management team is hoping for a recovery in the upcoming months to end the quarter in the green. Bed Bath & Beyond is looking to upgrade its digital capabilities to drive online sales higher while investing in several other private brands. It also aims to enhance the customer experience but continues to stare down the barrel given an extremely competitive environment.
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