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Don’t Write Off Bed Bath & Beyond Inc. Stock Just Yet

Bed Bath & Beyond stock - Don’t Write Off Bed Bath & Beyond Inc. Stock Just Yet

Source: Mike Mozart via Flickr

Bed Bath & Beyond Inc. (NASDAQ:BBBY) fell hard following an earnings miss. Declining profits have long plagued BBBY stock. Now with the massive drop and more intense competition, investors appear more worried than ever. However, one should also remember that brick-and-mortar-retail still shows signs of strength. Many traditional retailers have found ways to thrive as a result. At BBBY’s low valuation, now could be the time for a speculative position in Bed Bath & Beyond stock.

Bed Bath & Beyond Stock Fell Hard

The stock price fell by almost 20% as the company reported numbers that came in well below year-ago levels. Fourth-quarter earnings-per-share (EPS) came in at $1.48 per share. This beat consensus estimates. However, the company earned $1.84 per share in the same quarter last year. Overall sales increased 5.2% to 3.7 billion. However, comparable store sales fell by 0.6%.

Fiscal year 2018 earnings came in at $3.04 per share. The company earned $4.58 per share in the prior year. This marks the second consecutive year of declining profits.

What likely sent the price down was the expectation for BBBY stock to see profits decline for a third year. BBBY now expects annual profits in the low-to-mid $2 per share range for fiscal 2019. Analysts had previously predicted $2.77 per share.

Bed Bath & Beyond Stock Became Cheap for a Reason

By all measures, the declines have made Bed Bath & Beyond stock cheap. It now trades at a price-to-earnings (PE) ratio of 6.2. However, a consistent record of profit declines makes it cheap for a reason. As late as fiscal 2016, the company had earned over $5 per share. With drops such as these, analysts can understand why many think a bankruptcy comparable to the one seen at Linens n’ Things might be in the cards.

Further, the company has no moat. If BBBY went away tomorrow, consumers would suffer little deprivation. Amazon.com, Inc. (NASDAQ:AMZN), who has stoked fear into the entire retail sector, remains a threat. Companies such as Walmart Inc (NYSE:WMT), Target Corporation (NYSE:TGT), J C Penney Company Inc (NYSE:JCP), and Williams-Sonoma, Inc. (NYSE:WSM) have also put pressure on BBBY margins. Private companies such as IKEA and Crate & Barrel also sell similar items.

Lessons for Bed Bath & Beyond Stock

However, despite these negatives, I believe investors should still look at this stock. First, profits, while in decline, remain positive. Same with the company’s free cash flow. And even if 2019 earnings come in at $2 per share, the forward PE would stand at a reasonable 8.5 multiple.

Most of all, outsized gains could come if BBBY takes a page from the playbook of Best Buy Co Inc (NYSE:BBY). Best Buy is a no-moat retailer like BBBY. It also faced the threat of being squeezed out by Amazon. By 2012, Best Buy was losing money, and the stock had fallen to the $11 per share range. The company responded by building a robust online business, focusing on customer service and reducing costs. Positive earnings returned in 2014. As of today, BBY trades at over $72 per share. Profit growth for Best Buy, though uneven, has now grown to double 2014 levels.

Admittedly, BBBY has shown no signs it plans a similar turnaround. However, the BBY story also demonstrates that leaving BBBY stock for dead would be premature. Analysts believe net income will resume increasing in 2020. Also, with Bed Bath & Beyond stock at six times earnings, it begins to look cheap enough for a speculative buy. And unlike BBY, if the company acts now, it can begin the turnaround before BBBY stock begins reporting net losses.

Bottom Line for Bed Bath & Beyond Stock

The low PE of BBBY stock sets up a good position for a speculative buy in the equity. To be sure, Bed Bath & Beyond stock has become cheap for a reason. The lack of a moat and intense competition from numerous peers have hurt profitability and could threaten the company’s existence.

However, a retailer who happens to use a similar ticker offers a model for how a traditional brick-and-mortar retailer can thrive amid the competition from Amazon and other e-commerce companies. If management can engineer a BBY-type recovery for BBBY, those who buy now could profit handsomely.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/dont-write-off-bed-bath-beyond-inc-bbby-stock-yet/.

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