Ever since the Covid-19 pandemic ravished the physical retail sector, I’ve been loudly bullish on Bed Bath & Beyond (NASDAQ:BBBY), calling the depressed retailer one of the best and most overlooked turnaround stories in the entire market. See here, here, here and here. BBBY stock  just proved me right, by reporting blowout second quarter numbers which smashed expectations and largely underscored that the home goods retailer is in the midst of a big comeback.

BBBY stock popped more than 35% on the earnings beat. Shares are now up 494% from their coronavirus lows. This rally isn’t over just yet.

Bed Bath & Beyond stock was so depressed — and so many people on Wall Street thought this company was going bankrupt — that even if the company just stabilizes sales and slightly improves margins over the next few years (both of which appear increasingly doable), then BBBY stock will fly to $40.

Here’s a deeper look.

An Impressive Quarter for BBBY Stock

Bed Bath & Beyond’s second quarter was nothing short of jaw-droppingly impressive.

In the midst of a global pandemic, Bed Bath & Beyond reported 6% comparable sales growth, its first quarter with positive comps since 2016.

Let me repeat that because it’s worth repeating. In the middle of global pandemic that has killed consumer spending and shut down physical retail stores, Bed Bath & Beyond reported positive comps for the first time in four years.

Wow. Just wow. Clearly, this company is doing something right.

At the same time, gross margins rose 200 basis points year-over-year to 36%, thanks to a favorable product mix, lower coupon volumes and fulfillment efficiencies. The SG&A base declined more than a percent year-over-year. Adjusted EBITDA rose 36%. The company generated $750 million in cash flow, and reduced gross debt by 30%.

In other words, in what is arguably the toughest time ever for physical retailers, Bed Bath & Beyond grew sales, expanded margins, boosted profits, generated a ton of cash and improved its balance sheet.

Who said this company was on the verge of extinction?

Not me.

But a lot of people did — and that’s why you’re seeing BBBY stock take off like a rocket ship as such extinction fears go away.

Part of a More Impressive Turnaround

Zooming out, Bed Bath & Beyond’s strong second quarter print is part of a much bigger turnaround at the home good retailer.

Long story short, a new management team led by the widely-respected former chief merchandise officer at Target (NYSE:TGT) Mark Tritton, has come in and changed everything in order to help Bed Bath & Beyond turn into the preferred omni-channel destination for home goods.

Some of those changes 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, and retooling the supply chain to improve gross margins.

As evidenced by the company’s second quarter earnings report, these changes are working. For the first time in a long time, Bed Bath & Beyond is profitably growing again.

Because the company’s core home goods end market has enduring demand and because the company has so many stores and such high brand awareness, so long as management keeps executing on this turnaround plan, Bed Bath & Beyond does have a realistically good chance to re-establish authority in this market, stabilize sales, expand margins and grow profits.

If the company does that, BBBY stock will keep flying higher.

Big Upside Left for Bed Bath & Beyond Stock

The math to BBBY stock continuing to power higher isn’t hard to follow.

The U.S. furniture and homeware market projects to grow by 2% to 3% per year over the next few years, supported by the fact that we all still live in homes and need to furnish those homes. If Bed Bath & Beyond stabilizes share in the market, then the company should be able to grow sales at a similar 2% to 3% clip for the next few years.

Gross margins should improve with better pricing strategies, higher demand and reduced coupon usage. The opex rate should fall as the company closes underperforming stores, invests in automation technology and leans more into e-commerce sales. Profit margins, therefore, should expand meaningfully over the next few years.

If they do, then 2% to 3% sales growth will translate into ~10% annualized profit growth after the pandemic.

On that assumption, my modeling suggests that Bed Bath & Beyond is on track to do about $3 in earnings per share by 2025.

The current turnaround in Bed Bath & Beyond reminds me a lot of the turnaround Best Buy (NYSE:BBY) staged over the past few years. During that turnaround, BBY stock normally fetched a 13-times forward earnings multiple.

Let’s say BBBY stock fetches the same. A 13-times forward earnings multiple on $3 in 2025 earnings per share implies a 2024 price target for BBBY stock of nearly $40 — or more than double today’s price tag.

Bottom Line on BBBY Stock

The Bed Bath & Beyond turnaround has arrived.

Sure, some of the gains have already been realized, given that BBBY stock is up almost 500% from its coronavirus lows. But this stock continues to trade at a dirt cheap valuation, so that as long as this turnaround progresses, BBBY stock will keep powering higher.

Another 100%-plus upside over the next few years is likely.