What To Expect From Bed Bath & Beyond’s Stock in Q3?

Bed Bath & Beyond (NASDAQ: BBBY) is scheduled to report its fiscal third-quarter results on Thursday, January 7th. We expect the home goods retailer to likely beat the revenue expectations but fall behind the earnings estimates in Q3. Bed Bath & Beyond has shed all of its non-core segments in order to prioritize its survival in the retail market. In fact, the Covid-19 crisis caused the retailer to rely on its e-commerce platform, and people used their time at home to spruce up their interiors. This resulted in an 89% jump in comparable sales from its digital channel. We expect this trend to continue in Q3 as well. That said, the company still depends on its massive turnaround strategy as it has been struggling with margin pressure and declining store traffic amid competition from e-commerce and omnichannel competitors in recent years.

Our forecast indicates that Bed Bath & Beyond’s valuation is $18 a share, which is 8% lower than the current market price. Look at our interactive dashboard analysis on Bed Bath & Beyond’s Pre-Earnings: What To Expect in Fiscal Q3? for more details.

(1) Revenues expected to be ahead of consensus estimates

Trefis estimates Bed Bath & Beyond’s Q3 2020 revenues to be around $2.8 Bil, 2% ahead of the consensus estimate. The company’s revenues declined only marginally in Q2, driven by a pandemic-related boost in sales of decor and other home furnishings. 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.

2) EPS likely to be below consensus estimates

Bed Bath’s Q3 2020 earnings per share (EPS) are expected to be $0.15 per Trefis analysis, 21% lower than the consensus estimate of $0.19. The retailer’s efforts to reduce product costs, limit markdowns, and optimize distribution costs started to bear fruit in Q2. Bed Bath & Beyond also reduced operating expenses by 3.5% compared to the prior-year period, enabling it to post earnings per share of $1.76, compared to a loss of $1.12.

It should be noted that 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. Overall, 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 for the full-year 2020. We expect the company to post a loss of 64 cents for the full-year 2020.

(3) Stock price estimate below the current market price

Going by our Bed Bath & Beyond’s Valuation, with a Revenue Per Share (RPS) estimate of around $79.01 and P/S multiple of 0.23x in fiscal 2020, this translates into a price of $18, 8% lower than the current market price.

Bed Bath & Beyond has shed all of its non-core segments, selling off its tchotchkes outlet PersonalizationMall.com, the online flash sale site One Kings Lane, ancillary home goods businesses Cost Plus World Market, and Christmas Tree Shops. The company is going to focus solely on its namesake stores, baby care chain buybuy baby, and personal care outlet Harmon Face Values. 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. 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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