Bed Bath & Beyond's Not-So-Cozy Quarter Keeps Sell-Side Sidelined

The results grossly missed expectations.

The management sharply revised down its 2017 earnings per share forecast to $3, a 34.4-percent decline, while earlier the company had predicted a low-single-digit to 10-percent decline.

Additionally, the company announced transformational initiatives, with a four-part strategy to further enhance relevancy with customers and drive operational efficiencies. These initiatives include transforming customer service/in-store operations, enhancing gross margin, optimizing inventory productivity and driving improvement within logistics/supply chain, particularly around e-commerce fulfillment.

Reacting to the results and the guidance, Bed Bath & Beyond shares were slumping 15.87 percent to $22.74.

Baird Confined To The Sidelines

Commenting on the results, Baird analyst Peter Benedict said comp/gross margin headwinds are showing no signs of abating.

Baird lowered its 2017 earnings per share estimate from $3.95 to $3 and that for 2018 from $3.55 to $2.35.

"While we see an opportunity to drive incremental sales (expanded SKU offering, more personalized experience) and operational efficiencies, visibility into the timing (and level) of EBIT$ stabilization remains poor," the firm said.

Baird maintains its Neutral rating on the shares of Bed Bath & Beyond but lowered its price target from $28 to $23.

KeyBanc Cautious On Bed Bath & Beyond Shares

Citing the competitive headwinds, KeyBanc Capital Markets said it remains cautious on Bed Bath & Beyond shares Analysts Bradley Thomas and Sameet Desai attributed the decline in earnings per share to SG&A deleverage, one-off charges and continued competitive challenges. The analysts noted that gross margins contracted 99 basis points and that gross profit and operating profit dollar growth were the lowest since the third quarter of 2008.

That said, the firm remains hopeful that the management's investment will start to benefit the top line. However, the firm said near term, margins remain under significant pressure.

The firm believes the factors that pressured the results in recent years, including investments in the company's website & IT capability, deterioration in gross margin and online competition, would continue.

As such, the firm reiterated its Underperform rating and lowered its price target from $27 to $21.

Results Reflect Structural Challenges To Business Model

UBS analyst Michael Lasser said Bed Bath & Beyond's fiscal year second-quarter results reflect the structural challenges faced by its business model.

"While the co. highlighted a number of initiatives (such as more furniture SKUs & higher personalization) to drive increased customer engagement, there remains considerable uncertainty as to if & when these initiatives will help re-accelerate its top-line," the analyst said.

Citing these uncertainties and the scope for downward earnings revisions, UBS said it sees limited room for meaningful multiple expansion despite its inexpensive valuation.

As such, the firm maintains its Neutral rating on the shares of the company but lowered its price target for the shares from $30 to $24. Related Link: Retail Job Losses: Does This Point Toward Protracted Sectoral Weakness?