When a company announces at the beginning of its earnings conference call that participating analysts will be in “listen-only mode for the duration of the call,” you know things are really bad.  Such was the case with yesterday’s Bed Bath & Beyond (NasdaqGS: BBBY) Q1 2012 conference call. Management did not want to answer any questions about its sales slowdown or extremely weak guidance for the upcoming second quarter (ending August). To be sure, CFO Eugene Castagna said he would “be in the office” yesterday evening to answer individual questions, but isn’t it weird that he wouldn’t answer questions during the recorded conference call?

Until today (June 21^st), 2012 had been a stellar year for home-furnishings superstore Bed Bath & Beyond, with the stock up 27.1% compared to the S&P 500 up only 9.0%. But with its first-quarter earnings announcement yesterday evening after the market closed, everything changed. The stock collapsed by 17% today, the largest one-day drop since it went public in 1992. The result is that the stock’s 2012 outperformance has been completely eviscerated and it has now underperformed the S&P 500 for the year by more than a percentage point (5.5% vs. 6.9%).

First, the good news: the company’s first-quarter earnings per share rose 24% to $0.89 which beat analyst estimates by $0.04. It marked the 14^th consecutive quarter that the company’s earnings had beaten the high-end of management’s guidance range. Operating margins (operating income/revenue) increased 0.4 percentage points as the company cut costs more than expected.

End of good news.

The bad news is that the company beat the high end of its guidance by only a penny, the smallest beat in the past two years compared to a range of $0.04 to $0.17 over the past eight quarterly reports.  Even worse, same-store sales (SSS) rose only 3.0%, less than the 3.8% analyst expected and far below the 7.0% SSS gain in last year’s first quarter. In fact, the 3.0% SSS gain was the smallest since the second quarter of 2009. Furthermore, gross margin [(revenue minus cost of goods sold)/revenue] dropped 0.6 percentage points to 40.00% from 40.65%, the steepest gross-margin decline since the “Great Recession” of 2008. 

The lower gross margin was caused by increased customer use of discount coupons – I’m sure you’ve gotten those blue-and-white “20% off” coupons in the mail — which lowered sales prices and revenues. The company felt compelled to offer such price discounts in order to compete with lower-cost Internet retailers like Amazon.com (NasdaqGS: AMZN) and casa.com, which routinely sell the same brand-name products for 15% to 20% less.

Gross margin is typically more important than operating margin because gross margin reflects consumer demand whereas operating margin can be manipulated higher by one-time company cost-cutting.

The real killer was the company’s guidance for second-quarter earnings per share (ending in August) of only between $0.97 and $1.03, far below the $1.08 analysts were expecting. When even the top end of your guidance range is lower than analyst estimates, things are going badly. The company historically has issued conservative guidance that over the past two years has averaged $0.01 below analyst estimates, but the midpoint of Q2 2012 guidance is $0.08 below analyst estimates, which is materially worse than usual. Inventory increased 5.8%, which is 10% more than sales increased, which isn’t good. More price markdowns to clear the excess inventory look likely.

A Wells Fargo analyst summed up Bed Bath & Beyond’s problem this way:

The specialty retail channel is losing share in the housewares category as selection and low prices have become more ubiquitous, particularly on the Internet.

I don’t really see a solution to this long-term trend of lower prices. The 2008 bankruptcy of chief competitor Linens ‘n Things gave Bed Bath & Beyond a nice lift for a few years, but it was a temporary respite from the Internet threat. The company is trying to fight back through its acquisition of Cost Plus (which has a decent Internet presence), as well as investing in a new 800,000 square foot e-commerce fulfillment center in Georgia and a new IT data center. A significant $613 million of buying power is left on the company’s existing $2 billion stock repurchase program, which will also help stem the earnings-per-share slowdown, but the fact remains that growth is slowing.

UBS cut its price target on the stock and maintains a tepid “neutral” rating on the shares. Bed Bath & Beyond may be dead money for a while as the entire household furnishings sector has gotten hit hard by the economic slowdown. Just check out the stock-price declines recently suffered by Tempur-Pedic (NYSE: TPX), Select Comfort (NasdaqGS: SCSS) and Mattress Firm Holding (NasdaqGS: MFRM).

Bottom line: to use a housing analogy, Bed Bath & Beyond is the nicest house in a bad neighborhood which, my realtor friend tells me, is not the house you want to buy.