Struggling retailer Bed Bath & Beyond (NASDAQ:BBBY) just reported second quarter numbers that confirm that this retailer continues to struggle. Second quarter revenues missed expectations. So did comparable sales, operating profits, and net profits. The full-year guide was also trimmed. BBBY stock dropped big in response.
It now trades at its lowest levels since 2000. Given the huge crash in BBBY over the past several years, it feels appropriate to quote an article I wrote about Bed Bath & Beyond stock last year. In that article, I wrote the following:
Lets go back to the good old duck test.
If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
BBBY stock is a dead duck.
At that point in time, BBBY was trading around $23. Today, it changes hands at $15. The numbers have only weakened since a year ago, and bankruptcy looks like a real possibility for this company if things don’t turnaround soon.
In other words, BBBY stock is more of dead duck today than it was a year ago. In investing, it is a good rule of thumb to avoid buying dead ducks. As such, the smart move here is to avoid BBBY for the foreseeable future.
Bed Bath & Beyond Is Getting Squeezed out of Retail
The story at Bed Bath & Beyond is pretty simple. The company is getting squeezed out of the retail game.
When ecommerce came sweeping through and changed the whole the retail landscape, the biggest of those changes was the introduction of multiple new e-retail players with whom traditional retailers had to compete.
Some traditional retailers adjusted by building out omni-channel commerce capabilities, launching private label brands, focusing on in-store experiences, rationalizing real estate, so on and so forth. Others didn’t, and they suffered. That is the nature of competition.
Bed Bath & Beyond is one of the retailers that didn’t adjust, and as a result, the company is gradually being squeezed out of the retail game. Shoppers are leaving Bed Bath & Beyond stores en masse.
Because there is nothing unique or compelling about the Bed Bath & Beyond value prop, all those shoppers leaving Bed Bath & Beyond stores are going to a myriad of e-retail furniture shops, including Amazon (NASDAQ:AMZN), Wayfair (NYSE:W) and Houzz.
In other words, everyone is leaving BBBY stores. And only a fraction of those leaving the stores are turning into BBBY ecommerce customers. That is a surefire recipe for poor BBBY stock performance. This is exactly what we saw with both Sears (NASDAQ:SHLD) and J.C. Penney (NYSE:JCP), two stocks on their way to the retail graveyard.
Granted, BBBY isn’t burdened by as much debt as Sears or JCP. But, BBBY does have more debt than cash on its balance sheet, and with declining EBITDA, leverage is becoming a concern. Thus, so long as operations remain depressed, the chances of BBBY following in the footsteps of Sears and JCP are quite high.
The Stock Isn’t Cheap
The “buy the dip” thesis on BBBY stock hinges on the idea that the stock is cheap here. Earnings are supposed to come in $2 per share this year. BBBY stock trades hands at $15. Thus, the stock is trading at 7.5X this year’s earnings, which seems anemic for any stock.
But, investing is about looking forward, not back. If you look forward on BBBY stock, you will see this stock isn’t cheap.
Comparable sales growth has been negative, is negative, and will remain negative because this company is getting squeezed out of the retail game. Meanwhile, gross margins have fallen from over 40% a few years back to below 34% today, and are showing no signs of stabilizing. The opex rate has risen from under 25% a few years back to 31% today and is also showing no signs of stabilizing.
Thus, you have a situation defined by persistently negative comparable sales growth, eroding gross margins, and a swelling opex rate. If you put all three of those together, you get profit declines. And, not just slight profit declines. Big profit declines. In fiscal 2015, earnings were above $5 per share. This year, earnings will come in at $2 per share.
This erosion won’t stop. Realistically speaking, I actually think earnings have downside to about $1 per share over the next several years. In that scenario, this stock is far from cheap here, especially considering the debt on the balance sheet.
Bottom Line on BBBY Stock
BBBY stock is a dead duck. There is no other way to put it. Until this company shows some signs of an operational turnaround, the most likely path forward for this stock is to follow in the footsteps of JCP and Sears. That is a path that investors don’t want to follow.
As of this writing, Luke Lango was long AMZN.