Bed Bath & Beyond shares plummet 25% after sales warning includes surprise margin decline

Bed Bath & Beyond Inc. shares plummeted over 25% in Wednesday trading after the home goods retailer gave preliminary financial results that included same-store sales declines that analysts expected and margin pressure that they did not.

For December 2019 and January 2020, Bed Bath & Beyond BBBY, -26.36%  said same-store sales fell 5.4% due to traffic declines, inventory management issues and promotions and markdowns. Among those inventory issues was the lack of key product on the shelves.

“We are beginning to make bold and broad-based changes to modernize our business and better serve our customers,” said the company’s new chief executive, former Target Corp. TGT, +1.59%  executive Mark Tritton.

“Our ability to achieve this and change the trajectory of our current results will take time, as we remaster the fundamentals of merchandising, pricing and promotion, and focus on our digital channels as part of our go-forward strategy.”

Same-store sales in bricks-and-mortar locations fell nearly 11% while digital sales grew almost 20%.

Gross margin for the period fell around 300 basis points due largely to the aforementioned promotions and higher online sales.

“The surprise was not in comparable-store sales, but in both gross and SG&A [sales, general and administrative expense] margins,” wrote Wedbush analysts led by Seth Basham.

SG&A as a percentage of sales grew about 390 basis points.

Wedbush sees “glimmers of hope” in the digital sales growth, and is upbeat about the “bold changes” that Tritton is starting to make to transform the business. Wedbush rates Bed Bath & Beyond stock outperform with an $18 price target.

But Wells Fargo is more downbeat about the announcement.

“In our view, this represents a discouraging start to the Tritton era, and while it’s widely understood that a Bed Bath & Beyond turnaround would be no easy task, we believe it’s safe to say that near-term improvement appears increasingly unlikely at this point,” analysts led by Zachary Fadem wrote.

Wells Fargo rates Bed Bath & Beyond stock underweight with a $10 price target, down from $12.

KeyBanc Capital Markets notes the margin decline and SG&A impact, but looks to future possibilities, which includes monetizing assets, selling noncore businesses, cutting costs, and improving the merchandising.

“Looking ahead, competition remains intense (from both online and physical retailers), and it will take significant work to reposition the business to remain viable in the long-term, particularly considering the poor sales trends in 2019,” analysts said.

KeyBanc rates Bed Bath & Beyond shares overweight with a $16 price target, down from $18.

And: Coronavirus could drive up out-of-stocks at stores by April: Wells Fargo

Raymond James analysts agrees that there’s potential but said the update “tested [their] patience” because it provided no details.

“Unfortunately, this reminds us of the ‘old’ Bed Bath & Beyond investor communication,” analyst Bobby Griffin said.

Still Raymond James rates the stock strong buy with a $14 price target, down from $17 based on the asset sales potential.

“While we expect some criticism for our recommendation, we want to hear what the long-term strategy is from new CEO Tritton and ultimately what assets will remain, before we fully judge the feasibility of a turnaround,” the note said.

Bed Bath & Beyond has an average hold rating and $13.80 price target, according to 20 analysts polled by FactSet.

Bed Bath & Beyond shares have fallen 30.3%. The Consumer Discretionary Select Sector SPDR ETF XLY, +0.80%  has gained almost 21%. And the S&P 500 index SPX, +0.46%  is up 22.8% for the period.

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