In late May, I told InvestorPlace readers to buy Bed Bath & Beyond (NASDAQ:BBBY) before a surge in consumer spending sparked a huge rebound rally in the beaten-up retail stock. Since then, Bed Bath & Beyond stock has rallied nearly 40% in just three weeks, mostly on optimism about consumer spending as the economy gradually reopens.
Time to take profits? No. Far from it.
The company is one of the best turnaround stories in the market today. As a result, Bed Bath & Beyond stock has visible potential to double over the next six months.
Here’s three big reasons why that could happen:
- Consumer spending trends will continue to rebound over the next few months, helping fuel a sustained rebound in Bed Bath & Beyond stock.
- The company’s management team is doing everything right to ensure a brighter future for the retailer, once headwinds from the novel coronavirus pass.
- The valuation on BBBY shares remains severely depressed, and even conservatively optimistic growth assumptions yield huge upside potential in the stock.
Rebounding Consumer Spend
The U.S. economy rebounded with vigor in May as local and state authorities eased Covid-19-related restrictions, unleashing significant pent-up consumer demand.
In May, U.S. retail sales rose 18%. The Institute of Supply Management’s U.S. Manufacturing PMI – widely considered the best gauge of manufacturing activity – rose 1.6 points in May. The Non-Manufacturing PMI – widely considered the best gauge of economic activity in the services sector – rose 3.6 points. The labor market added 2.5 million jobs in May. Unemployment dropped. Air travel ticked up. So did physical shopping traffic.
There are widespread concerns that this recovery will be short-lived, and that a second wave of Covid-19 will short-circuit rebounding consumer spend.
I’m not convinced this will happen.
In my conversations with individuals and businesses across the country, there is a sense that the world will learn to manage Covid-19 risks for the foreseeable future. No more mass shutdowns. No more stay-at-home orders. Just a lot of businesses operating at limited capacity, and a bunch of consumers wearing masks and practicing social distancing.
Thus, going forward, I believe that even in the face of a second wave of Covid-19, consumer spending trends will continue to rebound. The world will learn how to manage the risks of this pandemic while allowing for economic production and some sense of social normalcy.
Against that backdrop, Bed Bath & Beyond’s stores will reopen. Consumers will go back into those stores. The company’s revenue and profit trends will meaningfully improve. And Bed Bath & Beyond stock will continue to rally.
Management Is Taking the Right Steps
Looking past Covid-19, Bed Bath & Beyond’s new management team – led by the widely respected Mark Tritton, who was the former chief merchandise officer at Target (NYSE:TGT) – is taking all the right steps to ensure a brighter, more stable and more profitable future for the antiquated retailer.
Specifically, Tritton has brought in a whole new cast of C-suite characters to modernize, simplify and optimize Bed Bath & Beyond. The steps they are taking to do this include:
- Revamping stores.
- Rightsizing the real estate footprint.
- Investing in e-commerce and building out omni-channel capabilities like BOPIS (buy-online, pick-up-in-store).
- Significantly reducing operating expenses.
- Retooling the supply chain to improve gross margins.
If the new management team successfully implements these initiatives, then the company should turn into a more relevant retailer. That means more stable sales and traffic levels, lower expenses, higher margins and bigger profits.
The big question: can they pull it off?
Dirt Cheap Valuation of Bed Bath & Beyond Stock
Assuming Tritton and company can pull off this turnaround – and that consumer spending trends continue to rebound into the back half of 2020 – then Bed Bath & Beyond stock could double by the end of the year.
Here’s the math.
U.S. retail sales have mostly grown at a 3%+ clip over the past several decades. Bed Bath & Beyond’s share of that market has slipped over the past few years, hence the choppy sales growth. But the aforementioned turnaround plan should help the company stabilize U.S. retail market share. Assuming so, then post-2020, the retailer is looking at steady 3%+ annualized sales growth.
Gross margins will improve with a re-tooled supply chain, better inventory management, less discounting and stronger demand. Positive operating leverage should kick as sales go up and management guts the opex model. Net profit margins should meaningfully expand on the back of gross margin expansion and positive operating leverage.
Net net, 3%+ revenue growth plus meaningful profit margin expansion equals a visible pathway toward $2 in earnings per share for Bed Bath & Beyond stock by 2025.
Based on a market-average 16-times forward earnings multiple and a 10% annual discount rate, that equates to a 2020 price target for Bed Bath & Beyond stock of more than $20.
Bottom Line on Bed Bath & Beyond Stock
Bed Bath & Beyond is one of the most enticing turnaround stories in the market today.
So long as management implements its various profit-boosting initiatives and consumer spending trends continue to rebound, then Bed Bath & Beyond stock will stay on a glide path toward $20.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.