What Is Bed Bath & Beyond’s Fair Value?

Bed Bath & Beyond‘s (NASDAQ: BBBY) stock is now trading almost 20% lower than its price at the beginning of the year, as it struggles with margin pressure and declining store traffic amid competition from e-commerce and omni-channel competitors. Much of this year’s stock decline came after its disappointing fiscal 2018 guidance. In addition, the company’s profits have also declined in recent quarters, in large part due to extensive coupon usage. Going forward, we expect the declining trend in 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 in fiscal 2018.

We have an $18 price estimate for Bed Bath & Beyond’s stock, which is slightly below the current market price. We have also created an interactive dashboard on what Bed Bath & Beyond is really worth, which details our key 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 can have on our price estimate.

Overview Of Estimates

We expect Bed Bath & Beyond to generate around $12.4 billion (relatively flat year-over-year) in revenues in 2018, and earnings of almost $300 million. Of the total expected revenues in 2018, we estimate $8.2 billion in the Bed Bath & Beyond business, almost $1.7 billion for the Christmas Tree Shops business, nearly $1.4 billion for the buybuy Baby business, and close to $1.1 billion in World Market business.

Margins Continue To Shrink

Bed Bath & Beyond’s gross margins continued to face pressure in the first quarter of 2018. The company’s gross margin declined by approximately 150 basis points (bps), from 36.5% in Q1 2017 to 35% in Q1 2018. The company identified an increase in net direct-to-customer shipping expenses as the primary reason for this decline, which resulted from more promotional shipping activity. In addition, a decrease in merchandise margin and an increase in coupon expense also reduced the company’s gross margins in the quarter. To add to that, the company is also grappling with fixed operating store costs while the store traffic continues to decline, leading to further margin pressure. Bed Bath & Beyond is trying to focus on cutting down its promotional activities – as promotions put pressure on margins – in order to reverse these negative trends. However, the margin pressure will likely continue in the near term due to increases in the overall expense structure for the accelerated spending associated with the company’s organizational changes and transformational initiatives.

Bed Bath & Beyond Operating Division Forecasts

We have calculated Bed Bath & Beyond’s total revenue in 2018 by estimating the revenues from the company’s Bed Bath & Beyond stores, Christmas Tree Shops, Harmon division, buybuy Baby division, and World Market Stores. Further, we have calculated the retailer’s divisional revenues by estimating the number of stores, square footage per store and revenue per square foot in 2018. We expect Bed Bath store count to be over 1010, with an average square footage per store of 35k and revenue per square foot of $233, translating into $8.2 billion in revenues in 2018.

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