Bed, Bath & Beyond (NASDAQ:BBBY) Hits a Wall

The BBBY Turnaround Hits A Wall

Bed, Bath & Beyond (NASDAQ:BBBY) emerged as a turnaround story over the summer and the fiscal Q2 results backed that thesis up. The problem now is the rebound and turnaround appear to have hit a wall in the form of lingering weakness in Mall-based retail sales. The core Bed, Bath, & Beyond franchise appears to be doing fine, it’s all those other little brands scattered throughout America’s malls that are weighing on results.

Bed, Bath & Beyond Whiffs In The 3rd Quarter

Bed, Bath & Beyond’s turnaround is focused heavily on eCommerce and those efforts are paying off. The company reported a 94% increase in eCommerce through the core BBBY channels with a 77% increase across the entire enterprise. The bad news is that eCommerce is not enough to offset the decline of in-store traffic the company is so reliant on.

The worst part, perhaps, is that net revenue not only fell on a YOY basis but decelerated from the previous quarter. The $2.62 billion in net consolidated revenue is down 5.1% from the previous year, 2.6% from the previous quarter, and missed the consensus by 430 basis points. Not good. In terms of comps, the company was able to produce positive comps in the range of 2.0% but that too missed the mark, and increasing costs offset the gains. The core BBBY brand saw its comps rise by 5.0%.

Moving down the report there is more good news than just the eCommerce sales but once again it is not enough to offset the decline of in-store traffic. The company’s gross margins improved 340 basis points and were aided by an improvement in SG&A expense to drive positive adjusted earnings. The downside is that GAAP earnings came in at -$0.61 and missed the consensus figure by over a dollar.

Looking forward, the company refrained from giving any FQ4 guidance but did offer an update on operations to-date. The company says that comps were positive across the network in December, the first month of the fiscal 4th quarter and then went on to reaffirm the full-year outlook. The company is expecting revenue in the range of $8.0 to $8.2 billion with EBITDA in a range slightly above the one previously offered.

Bed, Bath & Beyond Makes Improvements, Returns Capital

Bed, Bath & Beyond is having a hard time with its rebound but it is generating cash flow and free-cash-flow as well. The company produced $244 million in capital in the 3rd quarter and put it to good use. Not only is it working to streamline the portfolio but BBBY is also paying down debt and buying back shares. The company was able to pay down about $0.5 billion debt over the quarter, maintain $2.2 billion in liquidity, and buy back shares. REgarding the buyback, the company increased the buyback authorization to $825 million from the previous $675 million or about 30% of the market cap.

The Technical Outlook: The Shorts Have A Field Day With BBBY

Shares of BBBY fell more than 13% on the FQ3 report and may have farther to go if the shorts have anything to do with it. The short-interest was over 60% going into the report and may have something to do with today’s decline. The good news is that support appears to be strong at $17.50 and may lead to a buying opportunity if the shorts decide to cover. If not then we can expect to see this stock fall below the $17.50 support target a move to retest $15 or lower is very likely.