Full disclosure: I’ve been an outspoken bear on shares of struggling home merchandise retailer Bed Bath & Beyond (NASDAQ:BBBY) for the better part of the past two years. See here, here and here. During that stretch, BBBY stock plummeted from above $40 to below $10.
More recently, however, I took off the bear hat, and sounded a bullish tone on Bed Bath & Beyond stock in early October 2019. The reason for the flip? The stock had fallen very far, very fast. And given the company’s reasonable opportunity to stabilize sales and profits over the next few years, BBBY was just too cheap for its own good.
Month-to-date, BBBY stock is up more than 20%. From their 52 week lows reached in August, shares are up more than 70% — meaning that over the course of the past two months, BBBY stock has gone from big-time loser, to big-time winner.
Will the winning persist? Or will shares get back to their losing streak soon?
At this point, it’s tough to say. Bed Bath & Beyond stock does have an opportunity to surge towards $20 in a hurry. At the same time, the stock could drop back to $10. The latter looks more likely than the former, at present, so I think this is a rally to sell. But, I also understand the bull thesis here, and wouldn’t want to be stuck short the stock in the not-that-unlikely event that the bull thesis does materialize.
Bed Bath & Beyond Stock Could Surge to $20
The good news for bulls: Bed Bath and Beyond stock has a somewhat realistic pathway to a $20 price tag.
Over the past several years, BBBY’s sales, margins and profits have been eroded by intensifying competition and the lack of an appropriate response from management to that competition. Specifically, management didn’t build out a great digital business, didn’t develop robust multi-channel capabilities and didn’t hone in on maximizing the uniqueness of the product assortment. Ultimately, they failed to convince consumers that they should go to Bed Bath & Beyond as opposed to Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN) or Target (NYSE:TGT).
That management team is gone. Now, there’s a new sheriff in town. His name? Mark Tritton. His significance? He was the chief merchandising officer at Target, where he is credited as one of the key brains behind Target’s enormously successful multi-channel retail transformation over the past few years.
Quick history lesson. A few years back, Target was getting its butt kicked by Walmart and Amazon on multi-channel commerce. Tritton and company were tasked with ending this butt-kicking. They did that. Target has since gone from struggling retailer to retailer firing on all cylinders.
Bulls are betting Tritton can lead a similar transformation at Bed Bath & Beyond. He has less resources than he had at Target, and Bed Bath & Beyond is in a far worse starting position. But, he could pull off some semblance of turnaround through an enhanced multi-channel strategy, which could lead to slight revenue growth and margin stabilization.
If so, Bed Bath & Beyond could be on track to earn $3 in earnings per share by fiscal year 2025. Based on a historical 11-times forward earnings multiple and a 10% annual discount rate, that equates to a FY19 price target for BBBY stock of just over $20.
It Could Also Fall Back Below $10
The bad news for bulls: Bed Bath & Beyond stock is more likely to fall back below $10, than to rally to $20.
What Tritton did at Target should not be underplayed. The multi-channel transformation that happened over there was impressive and should be a blueprint for retail success. But Bed Bath & Beyond is not Target, and there are certain secular challenges here which may prevent BBBY stock from staging a huge turnaround.
Of note, Target has way more cash and cash flow to invest into developing multi-channel capabilities. Less cash and cash flow at Bed Bath & Beyond means less money pumped into multi-channel development, which means less robust multi-channel capabilities, which means lower consumer convenience. Ultimately, then, even if Bed Bath & Beyond does enhance its multi-channel game, that multi-channel game will still lag what Amazon, Walmart and Target offer.
In that world, customers will continue to flow out of BBBY stores and into others. Sales will remain challenged. Margins will remain under pressure. Profits won’t move higher.
If profits don’t move higher, BBBY stock won’t move higher, either.
Bottom Line on BBBY Stock
Bulls have reason to be optimistic on BBBY stock following its huge rally off the lows over the past two months. But, such optimism may be misplaced, because Bed Bath & Beyond is still staring at secular challenges which don’t project to go away anytime soon.
The investment implication? I wouldn’t chase the rally. I wouldn’t short the stock, either. Let new management show what they can do, and then re-assess after the numbers arrive.
As of this writing, Luke Lango was long AMZN.
