Thursday, 11 April 2019 18:35

Bed Bath & Beyond’s efforts to improve profitability hurt sales

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Bed Bath & Beyond Inc. is taking steps to improve its profitability, but is hurting its sales in the process.

The home goods retailer reported fourth-quarter[1] adjusted earnings per share of $1.20, beating the FactSet consensus of $1.11. But same-store sales fell 1.4%, and there was an 11% decline in sales to $3.33 billion, in line with FactSet expectations.

The results first sent shares higher in after-hours trading, but the stock took a 9.4% tumble on Thursday.

There are a number of initiatives and new technologies at work to turn around the business, though there are side effects.

Read: From eyelash extensions to a ride on a slide - department stores rethink what it means to have it all[2]

“Of course, actions like these do have a near-term impact on sales, but they benefit our overall profitability,” said Chief Executive Steven Temares on the earnings call, according to a FactSet transcript, referring to a coupon strategy that limits the availability of discounts.

“In advertising, we plan to continue to improve the efficiency of our direct mail events and digital marketing as we continued to manage the business with a bias toward profitability over near-term sales,” he said.

Wedbush thinks the road to higher profits will be “challenging” as competition online and continued investments take a toll. Analysts maintained their neutral stock rating but raised their $14 price target to $19.

“The decision to prioritize long-term profitability with Bed Bath & Beyond BBBY, -9.56%[3]   electing to raise its free shipping threshold, limit its coupon offerings and narrow its assortment to more profitable items likely hampered sales growth as well,” Wedbush wrote.

Analysts say that Bed Bath & Beyond is moving in the right direction, albeit slowly. In addition, activist investors[4] are applying pressure.

See: Amazon’s Whole Foods price cuts aim to build a ‘Costco-like’ relationship with Prime members[5]

“Despite the negative performance, we still believe that from a pure stock perspective the near-term risk/reward is favorable given the activist investor campaign,” wrote Raymond James. “With the upcoming proxy voting season approaching, we see more potential catalysts to drive Bed Bath & Beyond higher over the next few months.”

Raymond James rates Bed Bath & Beyond strong buy with a $20 target price.

Activists Legion Partners Holdings, LLC, Macellum Advisors GP and Ancora Advisors LLC oppose the steps Bed Bath & Beyond discussed during its earnings call.

“In our view, it does not make sense to make any couponing adjustments prior to executing on initiatives that would fundamentally improve the in-store experience for customers and drive retail traffic,” they said in a letter posted Wednesday.

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