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Will Bed Bath & Beyond's Strategies Reverse Dismal Run?

Zacks Equity Research

Bed Bath & Beyond Inc.’s BBBY shares have underperformed the industry in the past six months. The Union, NJ-based company has declined approximately 49% in the said time frame, wider than the industry’s fall of 25%.

The stock’s bearish run can be attributed to the company's dismal top-line performance, having missed the Zacks Consensus Estimate in five straight quarters. Although its bottom line surpassed the consensus mark in the last reported quarter, the metric fell on a year-over-year basis. (Read: Bed Bath & Beyond Q2 Earnings Top Estimates, Fall Y/Y)

Management’s soft view for fiscal 2019 had a negative impact on investor sentiment. The company now expects net sales to be around $11.4 billion and adjusted earnings in the range of $2.08-$2.13 per share for fiscal 2019. In fiscal 2018, Bed Bath & Beyond had generated sales of $12.03 billion.

The company has been witnessing soft comparable sales (comps) for a while now due to decline in a number of store transactions. This has been primarily weighing on its top-line performance over the last few quarters. Notably, comps dipped 6.7% in the fiscal second quarter, mainly due to lower store transactions, which was somewhat mitigated by a rise in the average transaction amount. In fact, comps in stores fell in high single-digit percentage range, while decreased slightly at its customer-facing digital channels. Looking back at the fiscal first quarter, comps had decreased 6.6% from the prior-year period.

Will Strategic Efforts Aid a Turnaround?

Bed Bath & Beyond is trying all means to adjust to the changing retail landscape, wherein competition has intensified. It remains on track with the transformation plan, which positions it well for success in the dynamic retail landscape. To this end, management has set four major near-term priorities — boosting top-line growth, resetting cost structure, reviewing and optimizing the asset base with its portfolio of retail banners, and reorganizing the organizational structure.

The company expects to reach the target of generating mid- to long-term revenue growth, near-term gross margin expansion and selling, general & administrative (SG&A) improvements, as well as sustainable outstanding operational support. It expects to boost revenue growth by focusing on portfolio strategy alignment including product assortment, customer engagement, learnings from Next Generation Lab stores and expanding online experience. Margins are likely to improve due to changes in assortment mix to increase sales, supply chain, and modifications in pricing and coupon strategy.

Improvements in store labor model, marketing initiatives and lower occupancy expenses are expected to optimize SG&A. Furthermore, the company remains committed to spend on human capital, data, and process improvements, reposition the flagship brand, as well as reinforce global sourcing capabilities.

Additionally, it is working on strategically expanding its store base. In second-quarter fiscal 2019, the company closed two stores and remodeled around 75 existing outlets. The majority of the remodeled outlets were Next Generation Lab stores. Recently, company-owned One Kings Lane (the digitally-driven home retailer) declared that it will expand its physical retail footprint with a third location in Boston's Seaport District on Oct 17.

In the long run, it expects to operate more than 1,300 Bed Bath & Beyond stores across the United States and Canada, and plans to expand other concepts from coast to coast. Moreover, the company remains focused on expanding, renovating and relocating stores to adapt to changing market conditions. Additionally, the Next Generation Lab stores — wherein it is testing various experiences and visual merchandising — are expected to boost customer experience and in turn drive sales and profitability.

We expect the aforementioned initiatives to act as tailwinds, thereby injecting some momentum in this Zacks Rank #3 (Hold) company’s performance in the coming months.

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