Bed Bath & Beyond To Slump After Its 20% Rally?

After almost a 20% increase in Bed Bath & Beyond’s stock (NASDAQ: BBBY) since the beginning of this year, at the current price of around $21 per share, we believe the retailer now has a significant downside. The home goods retailer’s revenues have declined 25% so far in fiscal 2020. The company was already struggling in this regard even before the coronavirus – with sales falling 7% in 2019. This stock and revenue mismatch signal a potential slump in Bed Bath & Beyond going forward. That said, the market might be overestimating the company’s turnaround potential of shedding its non-core assets and focusing on its digital future in the near term.

BBBY stock has largely underperformed the broader markets between fiscal 2017 and now. The retailer’s stock is around 7% lower than it was at the end of fiscal 2017, compared to 2% growth in the S&P. Our dashboard, What Factors Drove 7% Decline in BBBY’s Stock Between Fiscal 2017 and Now? provides the key numbers behind our thinking, and we explain more below.

BBBY’s stocked declined a major 49% from around $22 in 2017 to over $11 in 2018, as it started a costly battle to ward off competition from internet retailers. Although spending on its loyalty program, revamping its supply chain, and increasing its shipping costs in order to catch up with other online retailers resulted in stock price gain of 53% between 2018 and 2019 – the company’s stock was still down 21% from the 2017 levels. This was largely due to BBBY’s revenues declining from $12.3 billion in 2017 to $11.2 billion in 2019, driven by declining physical store sales. It should be noted that BBBY is predominantly a brick and mortar retailer, with roughly under a 20% contribution from digital sales. Finally, BBBY’s P/S also declined from around 0.25x in 2017 to 0.19x in 2019. While the company’s P/S is about 0.23x now, it could potentially see a downside closer to its historical levels.

How Is Coronavirus Impacting Bed Bath & Beyond’s Stock?

Bed Bath & Beyond has struggled with margin pressure and declining store traffic amid competition from e-commerce and omnichannel competitors in recent years. In fact, it was just initiating another turnaround plan when the pandemic hit. While the company’s comparable-store sales rose 6% year-over-year (y-o-y) in Q2, their first gain in four years, on the strength of digital sales, their store comparable sales were still down 12% y-o-y. This largely indicates that the company still has a long way to go.

As a part of the restructuring and focusing on its core businesses again – Bed Bath & Beyond has planned to unload its Christmas Tree Shops retail brand, its Linen Holdings unit, and a New Jersey distribution center – for roughly $250 million. The home goods retailer also presented a 3-yr outlook, wherein it intends to boost profitability through better inventory management and debt reduction, ultimately resulting in between $500 million and $1 billion in cumulative free cash flow from now through the end of 2023.

Covid-19 has boosted sales of decor and other home furnishings in the last quarter. As BBBY’s sales also shift toward digital business, the company continues to see margin pressures due to increased digital fulfillment costs. To add to that, the company already continues to face brutal competition from low-margin online pure-play retailers such as Wayfair and HomeGoods. It should be emphasized that cost cuts and improvement in product assortments and pricing can only partially offset the company’s current headwinds. As a result, the company will likely struggle to return to profitability in the near-term.

Although the company seems to have taken steps in the right direction now, everything will hinge on its ability to maintain its sales levels over the long term. For now, there are too many potential stumbling blocks.

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