Actually, Bed Bath & Beyond’s Earnings Are Good News for BBBY Stock

Bed Bath & Beyond (NASDAQ:BBBY) stock plunged in early July after the general merchandise retailer reported first quarter numbers that were, quite frankly, very ugly.

bed bath & beyond storefront (BBBY)

Source: Shutterstock

The company missed both top and bottom line expectations by a mile. Sales dropped 49% year-over-year in the quarter, including a 77% drop in in-store sales. Gross margins fell 780 basis points on the back of an unfavorable shift towards lower-margin online sales and lower-margin essential product sales, as well some expense deleveraging.

Expense deleveraging really showed up on the SG&A line, where the expense rate rose a whopping 20 points year-over-year. What was a narrow adjusted loss in the year ago quarter, swung to a wide loss this quarter.

To complicate matters, management announced that they will be shuttering about 200 Bed Bath & Beyond stores over the next two years, representing about 13% of the company’s 1,500 total store base at the end of 2019. BBBY stock naturally dropped 10% on the flurry of bad news.

But, from where I sit, Bed Bath & Beyond’s ostensibly ugly earnings report is actually good news for BBBY stock, and underscores why this beaten up retail stock can triple over the next few years.

Here’s why.

Bed Bath & Beyond Earnings Weren’t All Bad

Is anyone really surprised that the headline numbers from Bed Bath & Beyond’s earnings were bad?

Around 90% of the company’s stores were closed for most of the quarter. Consumer spending fell off a cliff in March, April, and May. Economic activity ground to a halt. No one was buying much of anything, besides hand sanitizers, masks, groceries, and soaps.

Against that backdrop, Bed Bath & Beyond was supposed to report awful numbers. No surprise there.

But there are a few pleasant surprises when you take a deeper look at some of the trends in the quarter. Simply consider:

  • E-commerce sales rose 82% in the quarter, including 100% growth in April and May.
  • The company’s new omni-channel growth initiatives, like Buy-Online, Pick-up-in-Store (BOPIS) and Curbside Pick-up, gained significant traction in the quarter.
  • Despite the 50% plunge in sales, Bed Bath & Beyond only burned $200 million in cash in the quarter, leaving about $1.2 billion left in cash on the balance sheet, which is more than enough to weather further turbulence.
  • Stores that have already reopened are performing ahead of internal expectations.
  • Management continues to push forward with transforming the supply chain to reduce cost of goods sold and improve gross margins.

In other words, if you back out store closures, Bed Bath & Beyond had a good quarter.

E-commerce sales surged. Omni-channel commerce initiatives gained momentum. Cash management was solid. Traffic trends improved once stores reopened. And the supply chain continued on its optimization trajectory.

All of those favorable underlying trends lay the groundwork for Bed Bath & Beyond to fire on all cylinders in late 2020 and throughout 2021 as Covid-19 hysteria fades.

Emerging From the Covid-19 Pandemic Stronger

Wall Street seems to be concerned that Bed Bath & Beyond is closing 200 stores. But these store closures actually position Bed Bath & Beyond to emerge from the Covid-19 pandemic a better, stronger, more relevant and more profitable retailer.

The big idea is that Bed Bath & Beyond has a huge physical retail business and small online retail business. But online retail is the future, and physical retail is the past. To that end, Bed Bath & Beyond has one foot stuck in the past.

Management is taking the Covid-19 pandemic to bring Bed Bath & Beyond into the future.

Close under-performing stores. Shrink the real estate footprint, thereby shrinking the expense base (indeed, these store closures are expected to result in annualized cost savings of up to $350 million). Modernize the retailer by improving the shopping experience and presentation at existing stores. Better integration technology into all of those stores. Leverage data-driven merchandising to improve the product assortment. Make BOPIS and Curbside Pick-up ubiquitous across all retail locations. Double-down on improving logistics for the online retail business.

Ultimately, these moves should dramatically improve the Bed Bath & Beyond shopping experience, and turn Bed Bath & Beyond into the modern retailer it needs to be in order to survive in today’s dynamic retail environment.

Consequently, emerging from the Covid-19 pandemic, Bed Bath & Beyond will be much stronger than it was coming into the crisis.

Bed Bath & Beyond Stock to $30?

My numbers suggest that, thanks to recent store closures and omni-channel transformation momentum, BBBY stock could soar to $30 over the next few years.

Broadly, I believe that lost in-store sales from the closure of 200 stores will be mostly offset by increased e-commerce sales and higher foot traffic in stores that remain open. Gross margins should improve as the supply chain is transformed and optimized for a heavier focus on direct-to-consumer sales. SG&A expenses should come down with store closures, which will lead to lower rent and labor costs.

Connecting those dots, I see net sales stabilizing around the $10 billion range by 2025. Between now and then, profit margins should meaningfully expand thanks to gross margin improvements and positive operating leverage. I believe ~4% operating margins are doable by 2025.

On those assumptions, my modeling suggests that Bed Bath & Beyond is on track to do $2 in earnings per share by then.

Based on a market-average 17-times forward earnings multiple, that implies a 2024 price target for BBBY stock of $34, representing a 3X increase from today’s BBBY stock price.

Bottom Line on BBBY Stock

I really like what the new management team is doing at Bed Bath & Beyond. They are turning the Covid-19 crisis — which has permanently accelerated the pivot towards online retail — into an opportunity to modernize what has increasingly become an antiquated Bed Bath & Beyond business model.

Yes, doing so will be challenging. But management is making all the right moves today to ensure a successful transformation. Plus, CEO Mark Tritton has a compelling track record of being good at these turnarounds.

As such, I continue to believe that BBBY stock can march towards $30+ prices within the next few years.

To that end, near-term weakness in the stock as a result of awful first quarter numbers that are more representative of Covid-19 than of Bed Bath & Beyond’s turnaround, looks like a longer-term buying opportunity.

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 rated one of the world’s top stock pickers 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. 

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