*
skip to Main Content
enquiries@thearmchairtrader.com

Market participants will be gearing up for the unofficial start to US earnings season in the week ahead, while a slew of economic releases and Federal Reserve speeches flood the calendar.

Investors will likely be focusing their attention on the health of the U.S. financial sector, with J.P. Morgan Chase (NYSE: JPM), PNC Financial Services (NYSE: PNC) and Wells Fargo (NYSE: WFC) each set to announce its latest quarterly results.

However, in the run-up to the big banks’ earnings, retail giant Bed Bath & Beyond (NASDAQ: BBBY) is slated Wednesday to unveil its fourth quarter of 2018 financials, when retail sales figures had ultimately descended into doom and gloom territory.

Bed Bath & Beyond

The New Jersey-headquartered company has been facing increasing pressure from activists Legion Partners Asset Management, Macellum Advisors and Ancora Advisors, who recently submitted 16 nominees to fully take over the firm’s board of directors.

Bed Bath & Beyond said in late March that it had “met with and held several discussions with Legion and Macellum over the past few weeks,” however despite repeated requests for their suggestions on improving the company’s business, none were forthcoming.

The retailer further noted that it had also invited them to participate in its board refreshment program, but instead they chose to “publicly attack” the company. Bed Bath & Beyond added that while its “directors and management were seeking to engage in good faith, it appears that the Legion and Macellum representatives were merely seeking information to support their attack.”

The actions follow a dive in the company’s stock of more than 49% from April 2018 to late December, while remaining roughly 12.3% away from its latest 52-week high at about US$18.12 ahead of the weekend, according the IBKR Trader Workstation (TWS).

Cuts and bruises

The fall in the firm’s shares had been accompanied in October 2018 by a fourth downgrade from Standard & Poor’s since January 2016. S&P’s ratings on the company had gradually slipped down the investment-grade credit quality ladder over that period until eventually being thrown into junk status.

To date, Bed Bath & Beyond is rated ‘BB+’ by S&P, while maintaining a high-grade ranking of ‘Baa3’ by Moody’s Investors Service. However, Moody’s had also cut its credit rating one notch in mid-October 2018 from ‘Baa2’.

Moody’s analyst Peggy Holloway said the downgrade reflected a pick-up in the decline of its Q2’FY18 gross margin, marked by higher coupon expense, lower merchandise margin and rising direct to customer shipping expense. In turn, the effects would spur leverage to remain above 3.0x and EBIT/interest to drop to around 3.0x. She continued that “slightly negative same store sales trends” had exacerbated the impact of margin pressure.

“The gross margin decline coupled with an anticipated rise in SGA expense to support necessary strategic initiatives suggests operating margins will drop more than we expected in fiscal 2018 causing leverage to increase and remain above 3.0x and EBIT/interest to drop to around 3.0x”, said Moody’s analyst Peggy Holloway. Also contributing to the downgrade is the slightly negative same store sales trends that exacerbates the impact of margin pressure.

Moody’s added that Bed Bath & Beyond is “constrained by our expectation that both competitive pressures and above average expenses (to support key initiatives) will continue to negatively impact operating margins.

“The company is fighting competition from e-commerce growth and other value players, including Wayfair, and Home Goods, as well as traditional players such as Target, Walmart and Amazon.”

Meanwhile the company’s capital spending has been committed to improving its product line, marketing, inventory, supply chain optimization and omni-channel capabilities, however Moody’s warned “there is significant execution risk associated with a multi-year transformation as comprehensive as the one Bed Bath has embarked upon.”

Overall, the ratings agency expects ongoing gross margin pressure at the firm, as well as higher SGA costs, as it invests in price and projects to support the transformation. Against this background, Holloway noted that margins “will not stabilize until fiscal 2020, but we expect the pace of the erosion to decelerate.”

A brighter ‘beyond’

In its Q3’FY18 filing in early January 2019, Bed Bath & Beyond said it was “ahead of plan with respect to its longer-term financial goals to moderate the declines in its operating profit and net earnings, this year and next.” The firm also said it was on track to grow net earnings by 2020, and based on its preliminary assumptions, believes that its fiscal 2019 net earnings per diluted share will be about the same as fiscal 2018.

Shareholders had generally celebrated the news, with Bed Bath & Beyond stock having skyrocketed around 20% on the day.

Among its Q3’FY18 results, the company reported net earnings of US$0.18 per share, or US$24.4m, down from US$0.44 EPS, or US$61.3m, in the same year-ago quarter. Net sales over the same period had risen by around 2.6% to roughly US$3.0bn, while comparable sales fell about 1.8%.

The market typically expects the retailer to earn a little more than US$1.10 EPS in Q4’FY18 compared to its actual US$1.48 EPS in the prior year’s quarter.

Bed Bath & Beyond’s Q4’FY18 earnings are set for release against a backdrop of several economic reports, which should provide more insights into the consumer landscape, as well as the financial sector as the next earnings season gets underway.

Monday, April 8

  • Factory Orders (Feb)
  • Consumer Inflation Expectations (Mar)

Tuesday, April 9

  • NFIB Business Optimism (Mar)
  • JOLTs
  • API Crude Oil Stocks
  • Fed Speech — Vice Chair Richard Clarida
    • The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices
    • At the Federal Reserve Bank of Minneapolis Spring 2019 Institute Conference – Fed Listens: Distributional Consequences of the Cycle and Monetary Policy, Minneapolis, Minnesota

Wednesday, April 10

  • CPI (Mar)
  • Wholesale Inventories (Feb)
  • EIA Crude Oil Stocks
  • FOMC Minutes (Mar 19-20 Meeting)
  • Roundtable — Vice Chair for Supervision Randal K. Quarles
    • Progress on the transition to risk-free rates
    • At the Financial Stability Board Roundtable on reforming major interest rate benchmarks, Washington, D.C.
  • BBBY Q4’FY18 Earnings

Thursday, April 11

  • PPI (Mar)
  • Initial Jobless Claims
  • Fed Speech — Vice Chair Richard Clarida
    • U.S. Economic Outlook and Monetary Policy
    • At the Institute of International Finance Washington Policy Summit, Washington, D.C.
  • Speech — Governor Michelle W. Bowman
  • Community Banking in the Age of Innovation
  • At the Fed Family Luncheon, Federal Reserve Bank of San Francisco, San Francisco, California

Friday, April 12

  • Import/Export Prices (Mar)
  • University of Michigan Consumer Sentiment (Apr)
  • JPM Q1’19 Earnings
  • PNC Q1’19 Earnings
  • WFC Q1’19 Earnings

The analysis in this material is provided by Interactive Brokers for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by Interactive Brokers to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Share this article

Steven Levine

Steven Levine is a Senior Market Analyst at Interactive Brokers, (IBKR), which provides online trade execution and clearing services to institutional, professional and individual investors for a wide variety of electronically traded products including stocks, options, futures, forex, bonds, CFDs and funds worldwide.

Oops! We could not locate your form.

Oops! We could not locate your form.

Oops! We could not locate your form.

Oops! We could not locate your form.

Oops! We could not locate your form.

Sign up for our daily morning digest

Stay ahead with our latest market analysis and insight, direct to your inbox every weekday morning at 8am

  • This field is for validation purposes and should be left unchanged.

 

Market insight and analysis, direct to your inbox

  • This field is for validation purposes and should be left unchanged.

 

Back To Top