Bed Bath and Beyond’s Q4 earnings outlook seems bleak

The Bed Bath and Beyond earnings are under pressure as inflation and supply chain bottlenecks hit revenues. While a sale of its buybuy Baby chain could unlock value in its share price, analysts are mixed on the prospects of such a deal closing.

Home, baby and wellness retailer Bed Bath and Beyond [BBBY] is expected to report a 71% plunge in year-over-year earnings per share and a 20% drop in revenues when it releases its Q4 results on 13 April, due to supply chain bottlenecks and weak consumer confidence as a result of higher inflation.

Weighing on margin is its major turnaround investment strategy, which includes a multi-million dollar spend on refurbishing some stores and closing others.

Analysts estimate BBBY will report earnings per share of $0.12 and sales of $2.08bn, largely in line with  Bed Bath and Beyond’s outlook of $2.1bn revenues and an EPS of between breakeven and $0.15.

For the full year analysts on City Index expect the group to post its fourth year in a row of lower sales with revenues of $7.9bn, compared with $9.2bn the year before.

BBBY stock drivers

The company is likely to record continued benefits from its loyalty programme and buybuy Baby stores. The remote working trend may also have helped demand as people spruce up their living areas.

Bed Bath and Beyond’s growing online presence, market-driven pricing to protect against inflation and more own brands will help its performance. More commentary on these aspects could support the BBBY stock’s performance.

Analysts on City Index believe Bed Bath and Beyond will see revenues fall in the year to February 2023 by 1.6% to $7.8bn, but will return to profit with an EPS of around $0.66. For the first quarter of 2022 analysts expect revenues to drop 6.5% year-on-year with an EPS of $0.03. “It suggests markets think it will be a tough start to the year but are expecting things to improve as the months go by,” City Index says.

“We will continue to execute our strategic transformation by diagnosing and reforming our legacy business to achieve our goals. As we prepare for 2022, we look forward to operating in a normalised environment with a base of business upon which to grow,” said CEO Mark Tritton at the company’s Q3 result announcement.

Turnaround or sale?

In October 2020 Bed Bath and Beyond unveiled a three-year transformation strategy to accelerate its digital-first offerings and drive sales, margin and cashflow growth. It focused on its core brands in the home, baby, beauty and wellness markets. Plans were set out for a reinvented loyalty programme, new owned brands, reducing the number of its suppliers and growing its omnichannel and digital presence.

Almost a year and a half into the turnaround, however, the Bed Bath and Beyond share price has barely budged at around $19.

It may not be a surprise then that it has 30.9 million shares shorted, about 33.3% of the free float according to a Reuters report in early March.

Ryan Cohen, chairman of video games retailer GameStop [GME], who has taken a 9.8% stake in the group, said Bed Bath and Beyond had an “overly ambitious” strategy. According to the Reuters report, Cohen said that it overpays top executives and is failing to reverse market share losses.

"We believe Bed Bath needs to narrow its focus to fortify operations and maintain the right inventory mix to meet demand, while simultaneously exploring strategic alternatives that include separating buybuy Baby Inc and a full sale of the company," Cohen wrote in a letter to the company's board.

Later in March, Bed Bath and Beyond hired three people from Cohen’s investment firm RC Ventures on to its board as independent directors. One of the key expectations is that they may facilitate a spinoff or sale of the buybuy Baby chain.

Underperformance in the past

In its third quarter Bed Bath and Beyond reported net sales of $1.8bn, down 28% on the same period in 2020 and missing expectations of $1.95bn. Its loss per share came in at 25 cents versus forecasts of breakeven.

Tritton said supply chain bottlenecks had hit the company’s bottomline by $100m. He warned that the hurt could be even higher in December compounded by a drastic reduction in promotional mailers to tempt people into its stores.

Tritton said: “During a quarter where our sales momentum was not where we wanted it to be, [we saw] improved momentum in November and strong gross margins demonstrating progress in our transformation.”

Bank of America analyst Jason Haas echoes the negative sentiment, reports The Fly. The group has struggled to keep pace with retail industry changes “after years of mismanagement and underinvestment,” said Haas. He is also not hopeful of a sale of buybuy Baby which may also be under pressure giving declining birth rates and online rivals such as Amazon [AMZN].