Bed Bath & Beyond downgraded as struggles persist

Dive Brief:

S&P Global Ratings on Wednesday lowered its issuer credit rating on Bed Bath & Beyond to BB+ from BBB-; the outlook is negative, according to a press release from S&P emailed to Retail Dive.
The retailer's highly promotional stance and the growing expense of its omnichannel services are likely to vex the company in the next 12 to 24 months, S&P said. "We believe the company's competitive position has eroded, as measured by a cumulative double-digit decline in EBITDA and 530 basis points (bps) of erosion in margins over the last two years."
Earlier this month, Moody's lowered the retailer's senior unsecured notes rating one notch to 'Baa3' and revised its outlook to stable from negative; the move reflected "a significant decline in Q2 gross margin driven by higher couponing, lower merchandise margin and higher e-commerce shipping costs," according to a Wells Fargo news brief emailed to Retail Dive.

Dive Insight:

Bed Bath & Beyond has struggled to sell goods that can be found at Amazon and elsewhere, and to get out from the margin-cutting weight of its famous blue coupons.

Last month the retailer reported that second quarter net sales were flat year-over-year, reaching about $2.9 billion. Net earnings in the quarter were $48.6 million, down from $94.2 million in the year-ago quarter as operating profit tumbled to $78.9 million from $168.8 million a year ago. Store comps, including in-store sales and "strong sales" from e-commerce, fell by 0.6%. The retailer slightly reduced its net sales model for the fiscal year, with comparable sales to be relatively flat to last year.

S&P's "negative outlook reflects our expectation that intense competition from online and traditional retailers will continue to shrink operating margins and uncertainty that remains as to whether the company can successfully execute its various strategic initiatives to improve operating trends," the rating agency said in its note Wednesday.

The main drivers for the hit to its gross margin in the most recent quarter were an increase in coupons, a decrease in merchandise margins and a hike in shipping expenses, CFO Robyn D'Elia told analysts, according to a conference call transcript from Seeking Alpha.

It's all the worse considering the robust economy and rising spending in Bed Bath & Beyond's core home goods segment, according to comments emailed to Retail Dive from GlobalData Retail Managing Director Neil Saunders in September, who called the company's second quarter results "grim" and "little short of terrible."

"The blunt truth is that Bed Bath & Beyond simply hasn't been up to the job of converting the momentum [seen] elsewhere in retail into its own commercial success," he said.

Despite a revamped loyalty program that executives said is resonating, the company is struggling to differentiate itself at a time when several other retailers, including Target, TJX's Home Goods, Amazon and Wayfair are all making their own plays in the same segment, Saunders also said.