Bed Bath & Beyond’s Stock Down 34% From Highs, Time To Buy?

Bed Bath & Beyond’s stock (NASDAQ: BBBY), a home goods retailer, plunged by almost 34% from its early June (2021) high of $44 but still remains higher by about 53% year-to-date – trading at $29 per share currently. The retailer saw an exceptional boost from the announcement of its plans to focus more on private-label brands in its inventory – as this would potentially capture a large portion of the profit margin available on the goods it sells. It is worth mentioning that the chain benefited from robust demand in its core home furnishings niche during the pandemic, and from its digital selling platform that saw a whopping 99% year-over-year (y-o-y) growth in revenues. BBBY also witnessed a 4% increase in comparable-store sales in its recent Q4, which marked the company’s third straight positive result after two consecutive years of declines. So does BBBY stock look attractive at current levels? We certainly don’t think so.

It’s important to note that these growth figures strip out the impact of management’s restructuring plan, which removed hundreds of stores from its selling footprint – leading to a 17% decline in revenues y-o-y in 2020. In fact, the specialty retailer was struggling even before the pandemic – with sales falling 7% in 2019 and earnings per share reporting in the red for a three-year consecutive period. In addition, the company continues to face brutal competition from low-margin online pure-play retailers such as Wayfair and HomeGoods. As it is, without greater fundamental improvement in its business, Bed Bath & Beyond could have a tough time sustaining its recent outperformance. Our dashboard, What Factors Drove 78% 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 $10 in fiscal 2019, as it started a costly battle to ward off competition from internet retailers. However, the company’s stock price rose 2.5x to around $27 in fiscal 2020 (year ended Feb 2021), on account of the successful transition to e-commerce during the pandemic and the optimism surrounding the vaccine rollouts. During 2018-2020, BBBY’s revenues declined 23% due to falling physical store sales. It should be noted that BBBY is predominantly a brick-and-mortar retailer, with roughly about 37% contribution from digital sales (in 2020). Finally, BBBY’s P/S grew from around 0.18x in fiscal 2018 to 0.35x in fiscal 2020. While the company’s P/S has grown to about 0.4x 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.

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 Q4 on the back of surging demand for home supplies and furnishings. During its fourth quarter 2020 (ended Feb. 27), the company’s revenue fell by only 16% y-o-y to $2.6 billion – despite its asset divestitures and the closure of 144 stores.  Looking further out, for the full year, the retailer is targeting $8.1 billion in revenue (compared to over $11 billion in 2019) and $512.5 million in operating income less non-cash items (EBITDA), and to buy back $312.5 million more in shares.

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.

E-commerce is eating into retail sales, but this might be an investment opportunity. See our theme on E-commerce Stocks for a diverse list of companies that stand to benefit from the big shift.

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