Home merchandise retailer Bed Bath & Beyond (BBBY) has left its customers, investors and analysts baffled with its operational and financial performance during the second quarter ending August 2021. While BBBY blames a sudden surge in COVID-19 cases during the last month of the reporting period for its weak sales numbers, there are factors bigger-than the latest pandemic wave at some of its Southern markets causing a dent. These include sub-par operations of stores, mismanagement of marketing resources and broader industry-specific macro-economic issues.
Although, the Company’s management admits to the missteps taken on the marketing side, it gives no clear reasoning as to why its ambitious strategy of remodelling of stores didn’t fetch the desired sales volumes despite nearly half (70) of the planned 130-150 stores having been remodeled already in 2021.
During the Q2 earnings call on September 30, Company’s President and CEO Mark Tritton attempted to lay down a long-term strategy for a higher scale and increased reach to the customers, but without a clear indication about the company’s plans to combat the current challenges it faces. The impact is therefore reflected on the company’s hammered-down stock, which has wiped off over one-third of the investor wealth since the Q2 earnings call. BBBY is last quoted at USD 14.59 on Monday.
1. What do the Q2 numbers say?
The Group revenues for the quarter stood at $ 1.98 Billion down 26% from $2.69 billion last year and lower than analyst projections of $2.06 billion. The adjusted gross margins stood at 34%, lower by 190 basis points against last year. Company attributed it to increased freight costs amidst the unprecedented supply chain challenges. BBBY’s sales “unexpectedly slowed” in August month – also the largest sales month in the quarter – due to “external disruptive forces such as the resurgence of COVID-19 cases and growing Delta fears created a challenging and volatile environment.” Mostly evident in the southern states of Florida, Texas and California, which collectively contribute nearly a third to BBBY’s total sales, hence the magnified impact on overall sales.
2. Should an investor worry?
Mark Tritton – President and CEO says that the grim picture is “stemming from both macroeconomic forces and internal execution factors.” The internal execution factors reveal that the company is still struggling to prioritize between physical and digital promotions to draw customers. It lost some opportunities to be more effective in allocation of marketing resources to stimulate and support traffic at stores and online. Second, the macroeconomic forces like the speed of industry inflation and lead time pressures added to the headwinds squeezing the margins. Investors and traders didn’t see this coming and started hitting the stop-losses! At the mid of the year and ahead of the holidays, instead of consolidating its strength and leverage the festive fervour, BBBY is seen going back to the drawing board reframing its strategy and outlook for the full year. This inconsistency arising from internal and external factors may weaken the company’s recovery at a crucial juncture when it is looking for a transformational turnaround.
3. A new baseline for growth
The good news is that the management claims to have diagnosed the problems and developed strong plans to change its trajectory. It plans a recovery by November with expectations of a strong holiday. BBBY continues to be below last year’s sales level following strategic closure of 200 stores under its fleet optimization initiative. But CEO, Tritton says, “We have a new baseline from which to grow,” as he lays down plans of enhancing the omni-channel presence, enabling cross-banner shopping and check out and enhancing customer experience through Bed Bath & Beyond, buy buy BABY and Harmon banners. Company continues with the tried-and-tested enhanced digital channel, which has delivered significant sales increase in 2019. Also, BBBY is readdressing its investments in marketing to address systemic and one-time issues relating to marketing to drive customer traffic.
4. Inflation, logistics and sustainability
The cost factors such as import freight, container costs, inbound freight, and then outbound freight became much more pronounced during the quarter. The BBBY management doesn’t look at these issues as minor anymore and doesn’t anticipate these macroeconomic factors to show any improvement anytime soon. BBBY is therefore exercising caution on the near-term pressures related to rising costs inflation and the ongoing tightening of supply availability. This will influence the pricing ability of the company as well as cast a shadow on the company’s long-term growth projections. Sustainability is subject to company’s ability to effectively address the internal and external factors influencing its sales. Hence, BBBY is acutely aware of the factors outside its control. This makes them hyper focused on offsetting inflation with the strategic pricing and promo optimization action.
5. Festive preparedness
In spite of a turbulent second quarter and uncertain macro level supply chain conditions, BBBY is not losing its sight from the holidays – which forms about half of the third-quarter revenues. It has at its disposal, some important tools like the assortment of products, inventory management, a revised marketing plan, a better and balanced digital as well as physical presence with remodeled stores. The company has more avenues to get customer engagement than it had a year ago during the peak of the pandemic. BBBY expects to give customers a renewed experience with better accessibility. Its investors can look for a buying opportunity in the stocks.
Summary:
Home goods retailer BBBY is no different from the industry, which has been reeling under the stressful macro-issues of supply-chain constraints, inflationary pressures and the uncertainty around the spread of Delta variant. Some debacles on the internal resource allocation has brought uncertainty about a sustained growth trajectory for the company’s finances. BBBY redraws its strategy for the third quarter and the full year, the sustained sell-off in the company’s stock indicates that a shaken investor confidence isn’t buying management’s word of promise.
Omni Talk is the retail blog for retailers, written by retailers. Chris Walton and Anne Mezzenga founded Omni Talk in 2017 and have quickly turned it into one of the fastest growing blogs in retail. 