Bed Bath & Beyond (NASDAQ:BBBY) stock perked up in late September after the analyst team over at Baird upgraded BBBY stock to “Outperform” while lifting its price target to $20.
To some investors, BBBY stock soaring to $20 may seem like a pipeline dream.
After all, this was a $3.50 stock just six months ago, mostly because Bed Bath & Beyond has been a struggling retailer in a shrinking physical retail world for several years. Indeed, the company hasn’t grown sales in almost five years.
But BBBY stock will soar to $20, mostly because a competent management team is flawlessly executing a promising turnaround strategy that will ultimately end in Bed Bath & Beyond turning into a more modern, more relevant and more profitable retailer.
As that happens, the fundamentals say that BBBY stock will soar to and even above $20.
Here’s a deeper look.
The BBBY Stock Turnaround
Bed Bath & Beyond is presently one of the market’s best turnaround stories.
Long story short, a new management team is led by the widely-respected former chief merchandise officer at Target (NYSE:TGT)Mark Tritton. Tritton was pivotal in executing a transformational turnaround at that retailer from physical retail dinosaur, to dynamic, omni-channel retail powerhouse. He and his team are taking all the right steps to ensure a brighter, more stable and more profitable future for Bed Bath & Beyond.
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.
These are essentially all the things Target did to go from zero to hero in the retail world over the past five years, meaning they have a history of “working.”
I suspect they will work for Bed Bath & Beyond, too, mostly because there remains robust demand for in-person home goods shopping, the company has a huge real estate footprint which can be leveraged to optimize logistics and the price is almost always rights at Bed Bath & Beyond.
If the new management team successfully pulls off this turnaround, 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.
Fundamental Upside to $20-Plus Price
The fundamentals say that BBBY stock can indeed surge to $20 rather soon.
Here’s the mental framework.
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 negative sales growth.
But the aforementioned turnaround plan should help the company stabilize its 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, especially through the closure of under-performing stores.
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.
Improving Economic Environment
When it comes to BBBY stock, it cannot be ignored that the macroeconomic environment is improving.
Specifically, the economy is normalizing from the Covid-19 shock as retail stores are reopening and consumers are going back outside again. This has led to a steady rebound in U.S. retail sales, with retail sales rising 18% in May, 8% in June, 1% in July, and 1% in August.
This rebound will persist for the foreseeable future, because Covid-19 hysteria and consumer confidence and comfort are only rebounding.
As this rebound does persist, Bed Bath & Beyond’s stores will get busier, and busier, and busier. Today’s depressed sales and profit trends will meaningfully recover. And BBBY stock will stay on this rebounding trajectory.
Bottom Line on BBBY Stock
BBBY stock offers investors a chance to partake in one of the market’s best turnaround stories.
This turnaround story will only gain momentum over the next several quarters, as the U.S. economy normalizes and consumer spending continues to rebound, and will ultimately end with shares eclipsing the $20 market in the not-too-distant future.
So, if you own the name, stick with the rally. If you don’t, consider buying in on the next dip.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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