While Bed Bath & Beyond (BBBY ) is not in dire straits, the company’s consistent underperformance over the last couple of years highlights the structural issues with its business model. After the closing bell yesterday, these issues resurfaced in the company’s Q3 2016 reported results. The home goods retailer missed analysts’ estimates on both the top and bottom line and lowered FY16 expectations significantly.The Company reported FQ3 EPS of $0.85 that missed by $0.13 a share and revenue of $2.96B (+0.1% Y/Y) that missed by $50 million. In reporting sales, the company boasted greater than 20% digital sales growth while total same-store-sales fell 1.4% versus the same period a year ago. Quite a dismal performance for the retailer yet again. Moreover, if it weren’t for the recent acquisitions and new store openings, total net sales would have been negative for Bed Bath & Beyond in the quarter reported.

As I have been analyzing Bed Bath & Beyond’s business for several years, I had greatly warned investors of the perils to come for the company. The greatest red flag concerning business operations from a metric standpoint has and continues to be contracting gross margins. In fact, Bed Bath & Beyond is operating at trough gross margins, worse now than during and just after the 2008 financial crisis. As a former consultant to Bed Bath & Beyond from 2004-2006, I received stock options in the company. In 2015, with shares at $76 I sold my stake in the company with the understanding the gross margins were not getting any better, even with all the capital expenditures issued. Since that time, I’ve contributed my analysis to investors in a series of articles. Some of these articles are noted below for investor consideration:

• Bed Bath & Beyond: Gross Margin Pressures Seen In Sluggish Consumer Spending 
• Bed Bath & Beyond Offers Preliminary Q3 Results Warning: But Management Had Offered Many Initiatives In Play 
• Bed Bath & Beyond's Gross Profit Margins Come Home To Roost 
• Bed Bath & Beyond: Stay Away 
• Bed Bath & Beyond: Beyond Hope, What Is There?

There are at least a dozen more articles I’ve written for investors to consider, and almost every article details business operations, constant couponing and constant gross margin contractions. The reasons behind the slow but steady declines in Bed Bath & Beyond’s metric performance are easily recognizable by visiting its brick and mortar stores. Baby boomers continue to be the main customer base of the company while the greater spending from the total consumer base is coming from outside of this demographic. Gen-X and millenials are largely absent from the retailer’s consumer base and as such the retailer is forced to play “catch up” with regards to appealing to a larger demographic. 

Bed Bath & Beyond has spent more than a $1bn on its e-commerce and digital facing business operations over the last 3 years, and while the 20%+ growth is nice to see, on the surface, it fails to compare with sales from its brick and mortar business that accounts for more than 96% of total sales. To make matters worse with regards to the capital spending and the meager returns on the invested capital, Bed Bath & Beyond was one of the first mainstream, big-box retailers to utilize digital sales channels back in 2003 with their Beyond Store use by employees in physical store locations. If a consumer wanted an item they didn’t see in the store, they could simply ask an employee and the employee would search for the item in the Beyond Store data base, along with other possible options. If the item was in the Beyond Store database, it could be purchased right there on the spot and shipped to the customer’s address of choice with a few clicks of a button. Again, this operation was going on since 2003. So back to those pesky gross margin contractions…

During the Q3 2016 period, Bed Bath & Beyond’s gross margins declined from 37.8% a year ago to 37 percent. This decrease as a percentage of net sales was primarily due to, in order of magnitude, first an increase in net direct-to-customer shipping expense as a result of more promotional shipping offer activity, including a change in the Bed Bath & Beyond free shipping thresholds from $49 last year to $29 this year. And for a few days, the retailer offered free shipping on all purchases.

Secondly, an increase in coupon expense, resulting from increases in redemption and the average coupon amount. Nothing really changes quarter-to-quarter for the retailer. One could literally cut and paste the reasons for gross margin contraction every single quarter and for the past 2-3 years. To make matters worse, regarding the company’s profit performance, they actually had a tax liability decrease YOY of roughly 80 basis points. 

The balance sheet is another issue regarding Bed Bath & Beyond and just another reason investors should consider the stock, which is trading at roughly 9X trailing earnings, may not be as cheap as it appears even when compared to its peers. The company has been slowly but surely diminishing its cash balance YOYOY. After Q3 2016, the Company had $559mm in cash and cash equivalents on the balance sheet. Only a quarter ago the retailer had $661mm on the balance sheet. The good news is that YOY the Q3 2016 cash on the balance sheet is only $6mm less. The bad news is this drain is likely to continue and heighten as the company continues to spend without any significant return on investment to the benefit of sales, earnings and shareholders.

Over the last decade or so, Bed Bath & Beyond has been a serial acquirer of various business that include buybuy Baby!, Harmon Face Values, Of A Kind, Cost Plus World Market, One Kings Lane and PMall more recently. The worst aspect of these acquisitions is the fact that almost every entity was experiencing steep revenue declines and profits prior to Bed Bath & Beyond stepping into the picture. One Kings Lane is a perfect example of an irrational and illogical acquisition. One Kings Lane was valued at over $1bn in 2014 and could not sell itself by 2016 for $100 million. It has been speculated that Bed Bath & Beyond acquired the online retailer for $30-$40 million. Left to its own accord, One Kings Lane would have declared bankruptcy in short order. But here comes the latest effort by the retailer to entice more consumers: the catalogue. 

To showcase the Company’s expanding assortment of goods, Bed Bath & Beyond released its first-ever Welcome Home Catalog in early October, containing 84 pages of product inspiration for the entire home. The hope with this new catalogue effort is to build awareness regarding its differentiated products and services. Initiative after initiative after initiative! While Bed Bath & Beyond touts the early success and next catalogue to be released in the spring, this has become the mantra for the company. New initiatives always look promising from a low base and low sample size, always!

Steve Temares, CEO of Bed Bath & Beyond, whom I knew all too well during my consulting years with the company, needs to go. I say this somewhat tongue and cheek, but the reality of the situation lay in the business metric performance under his leadership. There is no opinion in the matter regarding subpar metric performance where gross margins are around financial crisis levels if not a little lower, earnings per share have been stuck between $4.50 and $5 for nearly 5 years now and comp sales will be negative in 2016. Furthermore, most any revenue growth over the last 2-year period has been on the back of new store openings and digital sales growth. Steve Temares has done a great job with inspiring futile new initiatives and spending billions on acquisitions, technology and digital sales build-out. Investors voted down his most recent bonus package in April of 2016 and for performance-related issues. 

The stock is languishing, as it should, at what appears to be extremely low-level valuations. But… but be careful with regards to assuming shares are cheap and consider the company has reduced its earnings forecast to the lower end of the $4.50-$5 range previously offered. For all the spending and shares repurchased by the company, it has not materialized in the shape of better sales and earnings; it just hasn’t and for several years it hasn’t. If one were to suggest that shares are cheap, they would likely assume there are catalysts for sales and earnings ahead. What would those catalysts be? The CEO has offered a dozen or so would-be catalysts over the last 5-7 years, all of which have lead nowhere for profits and find shares down considerably since 2015 and while the major market indexes are achieving all-time highs.  

One Kings Lane and PMall are not the answers to Bed Bath & Beyond’s struggles long-term. I doubt they can even plug the holes that pervade its brick and mortar business. A $30mm valuation for One Kings Lane at a maximum of 1X sales does nothing for Bed Bath & Beyond, nothing. And don’t get me started on the PMall personalization business. 

Shares of BBBY are trading down significantly after releasing Q3 2016 results and lowering guidance for the full year. I would be of the opinion that shares will trend lower over the next 90 days and possibly break below $40 during this time. I offered the same sentiment through Stocktwits in November as shares surged absent investor consideration for the underlying fundamentals.