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Will Bed Bath & Beyond be able to Revive Lost Momentum?

Home furnishing retailer, Bed Bath & Beyond Inc. BBBY is distinctly positioned in the market backed by strong countrywide network, as well as strategic efforts to align merchandise with regional climate and demographics. The company remains committed toward driving long-term growth driven by strategic investments, omni-channel development and enhancement of product assortments through innovation.

The fourth quarter of fiscal 2016 marked a comeback for Bed Bath & Beyond, which reported positive earnings and sales surprise in the quarter. This performance came after top-line and bottom-line misses recorded in the trailing three quarters. Following the earnings announcement, shares of the company have risen nearly 5%.

However, the Bed Bath & Beyond stock showcased a dismal performance in the last six months as the sluggish mall traffic plagued results. This Zacks Rank #5 (Strong Sell) stock declined 7.1% in the last six months, underperforming the Zacks categorized Retail – Miscellaneous industry’s growth of 2.7%.

Further, the Zacks Consensus Estimate for fiscal 2017 and fiscal 2018 has declined 5.3% to $4.32 per share and 7.5% to $4.30 per share, respectively, in the last seven days. Moreover, the Zacks Consensus Estimate for the first quarter of fiscal 2017 has declined 13.3% to 65 cents per share in the same time frame. Also, the fiscal first-quarter estimate reflects 18.3% decline from the prior-year quarter. However, analysts polled by Zacks expect revenues of $2.81 billion for the fiscal first quarter, reflecting nearly 2.8% growth from the year-ago quarter.

What’s Behind the Slump?

Bed Bath & Beyond has been reeling under sluggish mall traffic, with increasing shift toward online shopping. This has largely offset the growth in online sales in the past few quarters.

While the company reported better-than-expected earnings and sales for the fourth quarter of fiscal 2016, earnings per share declined marginally year over year. Coming to comparable store sales (comps), though comps from customer-facing digital networks improved more than 20% in the fiscal fourth quarter, comps at stores fell at a low-single digit rate.

Further, gross margin remained pressurized owing to higher direct-to-customer shipping expenses, as well as a rise in coupon costs. The company also witnessed a rise in selling, general and administrative (SG&A) expenses on account of higher payroll and payroll-related expenses, as well as an increase in technology expenses.

The company anticipates these factors to linger as evident in its bleak outlook for fiscal 2017. Bed Bath & Beyond projects net sales for fiscal 2017 to increase in the low to mid-single digit percentage range. While the company anticipates comps to improve in fiscal 2017, the range is likely to be between relatively flat and slightly positive. Additionally, the company expects gross margin and SG&A expense deleverage given the persistence of the aforementioned factors in fiscal 2017. Consequently, the company envisions fiscal 2017 earnings per share to decline in the range of low-single digits percentage to 10%.

Furthermore, the company’s exposure in international markets makes it vulnerable to the adverse currency fluctuations, which is a serious threat.

Bottom Line

We remain encouraged by the company’s long-term prospects driven by strategic initiatives, capital allocation strategy and shareholder-friendly moves. However, its near-term view is strained by soft in-store performance and the likely fall in margins.

Further, the company’s Momentum Score of “F” justifies our view that the stock will continue to lose momentum going ahead.

Key Picks

Meanwhile, investors may consider better-ranked stocks in the broader Retail-Wholesale sector including Big 5 Sporting Goods Corp. BGFV, The Children’s Place Inc. PLCE, both sporting a Zacks Rank #1 (Strong Buy) and Foot Locker Inc. FL, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Big 5 Sporting, with a long-term earnings growth rate of 12%, has surged 41.7% in the last one year.

Children’s Place has gained 8.5% year to date. Moreover, it has a long-term earnings growth rate of 8%.

Foot Locker has jumped 21.5% in the past one year. The stock has a long-term earnings growth rate of 9.7%.

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