Bed Bath & Beyond Stock To Fall After Climbing 200% ?

Bed Bath & Beyond stock (NASDAQ: BBBY), a home goods retailer, saw its revenue decline 14% to a consolidated figure of $9.7 Bil for the last 4 quarters from the consolidated figure of $11.34 Bil for the 4-quarter period before that. Despite this, BBBY stock has gained a whopping 193% – moving from about $10 to $29 in the last 12 months. Investors seem to be pleased with the company’s turnaround plan of shedding its non-core assets and focusing on its digital future. That said, we still believe that this mismatch between revenue growth and stock movement over recent quarters also points to a likely reduction in BBBY stock in the near future.

The specialty retailer was struggling even before the coronavirus – with sales falling 7% in 2019. To add to that, the company already continues to face brutal competition from low-margin online pure-play retailers such as Wayfair and HomeGoods. As BBBY’s sales shift toward digital business, the company continues to see margin pressures due to the increased digital fulfillment costs. 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. Our dashboard, What Factors Drove 74% Gain in BBBY’s Stock Between Fiscal 2018 and Now? provides the key numbers behind our thinking, and we explain more below.

BBBY’s stock declined almost 35% from around $17 in fiscal 2018 to roughly $11 in fiscal 2019, as it started a costly battle to ward off competition from internet retailers. During this period, BBBY’s revenues declined more than 7% due to falling physical store sales. It should be noted that BBBY is predominantly a brick-and-mortar retailer, with roughly only about 20% contribution from digital sales. Finally, BBBY’s P/S also declined from around 0.19x in fiscal 2018 to 0.12x in fiscal 2019. While the company’s P/S grew to about 0.32x now, it has a downside risk when compared to the P/S multiple of the last few years as the market might be overestimating the company’s turnaround potential.

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. 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.

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

While BBBY has been struggling with weak sales trends, the management’s latest restructuring plan delivered improving results in Q3 on the back of surging demand for home supplies and furnishings. The company saw its comparable-store sales rise 2%, the second straight quarter of growth in that metric. The prior quarter’s increase was the first time the chain had expanded sales since late 2016.

In the first nine months of fiscal 2020, revenue fell 18% year-over-year (y-o-y) to $6.6 billion. However, its net loss tapered from $548 million to $160 million as it divested some assets, cut costs, and stabilized gross margins. The company issued a conservative outlook for the fourth quarter of revenues falling in the low double-digits while citing major traffic declines during key shopping days. Looking further out, the retailer is targeting sales between $8 billion and $8.2 billion in fiscal 2021 compared to over $11 billion in fiscal 2019.

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

While BBBY stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Cognex vs. Amazon shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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