Is the Worst Yet To Come For Bed Bath & Beyond?

Despite almost a 68% decline in Bed Bath & Beyond stock (NASDAQ: BBBY) since the beginning of this year, at the current price of $5 per share (as of May 14th), we believe BBBY still has downside. Consumers under lockdown-style conditions could likely forego home-improvement projects and focus on buying necessities such as food and medicine. BBBY is still very much a brick and mortar business, and it has been struggling due to the store closures (retail banners except buybuyBaby and Harmon Face Values) to contain the spread of the deadly virus. It should be noted that the retailer makes only 20%~ of its revenues from its online channel.  

BBBY stock has also largely underperformed the broader markets between 2017 and now. In fact, BBBY stock is down a significant 73% since the end of 2017, a little over two years ago, as compared to a 4% growth for the S&P 500. Below, we outline a case that could see Bed Bath & Beyond’s stock decline going forward due to structural adjustments in the market, causing the company’s stock to decline to levels of under $3 per share.

Our dashboard Bed Bath & Beyond Downside: How Low Can BBBY Stock Go? provides the key numbers behind our thinking for the drop, and we explain more below. One of the contributors to BBBY’s stock price decline over the last two years has been the contraction of its P/S multiple, which, on a trailing basis, declined from about 0.2x at the end of 2017 to around 0.1x currently.

So what’s the likely trigger and timing to this downside?

The current coronavirus crisis will likely have a significant impact on Bed Bath & Beyond’s business, due to its impact on the global economy. The non-essential retailers have been particularly hard hit during this pandemic. To add to that, Bed Bath & Beyond is in the midst of a Hail Mary turnaround as comparable-store sales and earnings have declined in recent quarters.

We believe BBBY’s Q1 results in July will confirm the hit to its revenue. It is also likely to accompany a lower Q2 as-well-as full-year 2020 guidance. Specifically, we believe the full-year revenue expectations formed by the market at the time of Q1 results may be closer to $7.2 billion – about 41% lower than its 2017 revenue of $12.3 billion, and 35% lower than the 2019 revenue of $11.2 billion. Our dashboard shows key components of BBBY’s revenues.

The market isn’t going to stomach this well and BBBY’s P/S multiple is likely to shrink from the current 0.1x to about 0.04x. Separately, the sharp reduction in revenues will likely be accompanied by a reduction in operating expenses. This could imply a significant reduction in net income margin for the year from -5.5% in 2019 to about -7.1% in 2020.

Will such a price drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.

We also compared the trend in Bed Bath & Beyond Stock over recent months with the 2008 crisis.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020, and as the coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. 

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of BBBY’s multinational peers, including Home Depot and Lowe’s. The complete set of coronavirus impact and timing analyses is available here.

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