Can BBBY’s Stock Trade Higher Post Q3 Results?

Bed Bath & Beyond (NASDAQ: BBBY) is scheduled to report its fiscal third-quarter results on Thursday, January 6th. We expect the home goods retailer’s stock to likely trade higher with revenues and earnings beating market expectations post the third-quarter results. The company faced a challenging environment in the second quarter as the Covid fears re-emerged amid the Delta variant spread. The only positive takeaway from the Q2 earnings was its strong balance sheet. The company generated $75 million in operating cash flow during the quarter, driven by working capital improvement. Its total liquidity stood at $2 billion – with $1.1 billion in cash and investment and another $1 billion from the asset-based revolving credit facility. As such, it looks like the company can still continue to spend on its turnaround initiatives going forward. However, everything will hinge on its ability to maintain its sales levels while improving profitability over the long term.

For the third quarter, Bed Bath & Beyond expects flat comparable sales, net sales between $1.96 billion to $2 billion, and adjusted EPS to range between even ($0.00) and $0.05. BBBY lowered its full-year 2021 guidance and now expects earnings to range between $0.70 and $1.10 on net sales of $8.1 billion to $8.3 billion. It also expects an adjusted gross margin between 34% and 35% for the full year.

Our forecast indicates that Bed Bath & Beyond’s valuation is around $17 a share, which is 13% higher 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 slightly ahead of consensus estimates

Trefis estimates Bed Bath & Beyond’s Q3 2021 revenues to be around $2 Bil, slightly ahead of the consensus estimate. In Q2, the company’s revenues declined a large 26% year-over-year (y-o-y) to $2 billion, missing the company’s guidance range of $2.04 billion to $2.08 billion, largely due to comps falling 1%. The retailer reported that traffic slowed significantly during the key month of August and therefore sales did not materialize as anticipated. That said, falling customer traffic amplified the unprecedented supply chain issues and rising cost pressures on the company. Trefis estimates BBBY’s Revenues to decline 11% y-o-y to $8.2 billion for the full year.

Recently, the home products retailer also announced a shift in its business model that includes a key tie-up with Kroger, a national supermarket chain. Under the collaboration, BBBY will offer an extensive selection of its most popular home and baby products to Kroger customers via Kroger.com, and eventually at a number of its grocery stores. In addition, the retailer will also begin a small-scale store-within-a-store pilot project sometime this year. All these moves appear to be in line with Bed Bath & Beyond’s strategy to reinvigorate the company’s struggling business. 

2) EPS likely to beat the consensus mark

Bed Bath & Beyond’s Q3 2021 earnings per share (EPS) are expected to come in at 6 cents per Trefis analysis. In Q2 2021, the weak sales figure combined with the spiking costs resulted in a net loss of $73 million (or -$0.72) compared to a $218 million (or $0.04) gain a year ago. 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 faces brutal competition from low-margin online pure-play retailers such as Wayfair and HomeGoods.

(3) Stock price estimate above the current market price

Going by our BBBY’s Valuation, with an earnings per share estimate of around 79 cents and P/E multiple of 21.5x in fiscal 2021, this translates into a price of around $17, almost 13% higher than the current market price.

The home goods retailer also presented a three-year outlook, wherein it intends to boost profitability through better inventory management and debt reduction, ultimately resulting in $500 million to $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, everything will hinge on its ability to maintain its sales levels over the long term.