Time and time again over the past year, I’ve written that Bed Bath & Beyond (NASDAQ:BBBY) stock is, quite frankly, a loser (see here, here and here). BBBY stock has been cut in half, from just under $20 in September 2018 to under $10 in September 2019.
Fortunately for bulls, with BBBY stock down 50% since September 2018, I think that the worst of the plunge in Bed Bath & Beyond stock may be over. Note the emphasis on may.
Here are the facts. We are in arguably one of the best eras ever for U.S. consumers, defined by record low unemployment, strong wage growth, low rates, good credit, robust consumer confidence and muted inflation. Yet, despite that exceptionally favorable backdrop, Bed Bath & Beyond’s numbers are terrible. Comparable sales continue to drop, and the trend is actually accelerating in the negative direction. The physical business continues to decline at an accelerated rate, while the digital business is losing momentum. Gross margins are dropping. The operating expense rate is rising. Profits are falling fast and hard.
That’s the bad news. The good news is that profits have a chance to stabilize around the $2 per share range over the next several years. If they do, then BBBY stock below $10 is just too cheap for its own good.
As such, I think the worst of the BBBY stock selloff may be over. I’m not buying the dip — it’s still too risky for me — but I don’t fault anyone for seeing the stock as undervalued here.
Secular Challenges Remain
When it comes to BBBY stock, the fundamentals aren’t great. Specifically, there are secular challenges here which project to hang around for the foreseeable future.
The story is pretty simple. Once upon a time, Bed Bath & Beyond was a go-to physical retailer of various home goods related products. Then, the e-commerce wave rippled through the retail world. Amazon (NASDAQ:AMZN) started selling home goods related products, too. Wayfair (NYSE:W) became a thing. Walmart (NYSE:WMT) and Target (NYSE:TGT) more aggressively expanded their product assortments to have heavier overlap with the stuff Bed Bath & Beyond sells.
As such, e-commerce disruption eroded Bed Bath & Beyond’s unique product value prop. At the same time, all the bigger players in the retail world had more resources to build out better and more robust digital and omni-channel capabilities. The result? Bed Bath & Beyond turned into the least capable and convenient retailer in the space it used to dominate.
The numbers speak for themselves here. Comparable sales have been negative since 2016. Gross margins have been dropping since 2015. Operating profit margins have dropped since then, too. Profits have been wiped out. As has BBBY stock.
Will things turn around? Probably not. The consumers who left Bed Bath & Beyond stores are clearly getting what they need at Walmart and Amazon, and there’s little reason to believe they will come back to Bed Bath & Beyond. But, could things stabilize? Potentially, yes. And, if they do, BBBY stock could fly higher from here.
But, Bed Bath & Beyond Stock Is Cheap
The bull thesis on BBBY stock is pretty simple. There is a chance that profits stabilize from here into the foreseeable future. BBBY stock isn’t priced for this stabilization. As such, if it materializes, the stock could fly higher.
Today’s trends are really bad for Bed Bath & Beyond. Comparable sales dropped a multi-year worst 6.6% last quarter. Gross margins continue to retreat. The operating expense rate continues to rise thanks to lost revenue scale. Profits continue to fall.
But, there’s a somewhat visible pathway to stabilization here. That is, Bed Bath & Beyond is pouring a bunch of money into store refreshes and technology integrations. That could lead to stabilizing sales trends. At the same time, the company is lessening its reliance on coupons to drive sales. That is already leading to better-than-average gross margin performance. The store refreshes should end soon, and once those refreshes end, there could be lower operating expenses in the future.
Big picture — Bed Bath & Beyond has a unique opportunity to stabilize sales and improve margins over the next few years. Cautiously, I believe that such stabilization could result in the company’s earnings per share hovering around $2 for the next few years.
This is a $10 stock. That means the stock is trading at 5-times what looks to be a stable earnings base going forward. That’s just too cheap. As such, if the company does stabilize its profits over the next few years, BBBY stock could fly higher from here.
Bottom Line on BBBY Stock
I’m not buying the dip in BBBY stock. I think that the profit stabilization narrative, while plausible, lacks sufficient clarity to make the stock worth the risk at this point in time.
Having said that, I do see a pathway for the stock to fly higher from here. As such, I’m pulling back on my bearish sentiment. The worst may indeed be over.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.