Why We Revised Our Price Estimate For Bed Bath & Beyond To $17

We recently revised our price estimate for Bed Bath & Beyond (NASDAQ: BBBY) downwards to $17, which is roughly in line with the current market price, on account of lower expected gross profit and operating profit estimates. The home goods retailer’s 2017 performance has been mostly below its guidance as well as market expectations. The company’s stock is now trading 22% lower than its price at the beginning of the year, with much of the decline coming after the company’s disappointing fiscal 2018 guidance, and driven by its costly battle to ward off competition from internet retailers such as Amazon. The company’s stock is also down more than 50% in the past year. The primary reasons for the steep declines are lower store comparable sales and shrinking margins. Accordingly, we have adjusted our forecasts to reflect the current trends.

We have revised our net income estimate downward from $360 million to $310 million for 2018, implying EPS of around $2.28. Further, we have also reduced our trailing twelve-month P/E multiple for the company to 7.5 from a previous 8.5, which – when combined with the estimated EPS – gives us price estimate of $17. Our interactive dashboard details our forecasts and estimates for the company. You can modify the interactive charts in this dashboard to gauge the impact that changes in key drivers for Bed Bath & Beyond can have on our price estimate for the company.

Margin Pressure Likely To Continue

In 2017, Bed Bath & Beyond’s operating margin fell to 6.2%, down 310 basis points. Both gross margins (-150 bps) and net margins (-220 bps) compressed as well. The company identified an increase in net direct-to-customer shipping expenses as the primary reason for the decline in gross margins, which resulted from more promotional shipping activity, as the retailer’s free shipping threshold in Q1 2017 was lowered to $29, compared to $49 for part of Q1 2016. In addition, a decline in merchandise margin and an increase in coupon expenses also reduced the company’s gross margins during this period. To add to that, the company is also grappling with fixed operating store costs, while store traffic continues to decline, leading to further margin pressure. Consequently, we have lowered our 2018 estimate for Bed Bath & Beyond’s gross profit by $100 million to $4.3 billion due to higher expected operating expenses.

Based on the above estimates, and our adjustments to operating expenses, we have decreased our forecast for the company’s operating income by nearly $200 million to $350 million for 2018. We expect a slight increase in our SG&A cost forecast based on continuous investments in digital initiatives and growth in payroll related expenses. In addition, the company expects its interest expense to reach about $75 million this year. Overall, these adjustments have resulted in a more than 10% drop in our net income forecast.

Going forward, we expect the declining trend in the Bed Bath & Beyond’s profitability to continue in the near term. This is because the company is trying to remodel both its online and offline store formats at the same time –  including redesigning stores, spending on its loyalty program, revamping its supply chain and increasing its shipping costs in order to catch up with other online retailers – which could result in a further decline in margins.

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