Bed Bath & Beyond (NASDAQ:BBBY) became a favorite of Reddit traders in January because short-sellers held two-thirds of the shares. BBBY stock went as high as $53 a share before falling to Earth in February. It closed yesterday at $26.27, at a market cap of $3.18 billion.
After praising its turnaround plans in November I got back in at around $20. I was shocked by the meme move and got out with a profit.
I’m now looking to get back in. Here’s why.
How BBBY Stock Became a Meme
BBBY stock became a favorite among the Reddit crowd because its market cap was modest, and analysts were down on it. A November quarter loss of $75 million, or 61 cents per share, on revenue of $2.6 billion came out just as the memes began. More analysts now say you should sell the stock than buy it, although their price targets are ahead of where the stock is now trading.
For the Reddit crowd this meant small purchasers could push the price higher against a short squeeze. Shorts are borrowing shares, often with leverage, and must buy them back. Raising the price can force them out because margin loans must be recapitalized against losses.
The squeeze has since weakened considerably. Fintel data shows short interest at just 27% as of Feb. 8. It was at 65% on Jan. 15. Even at its height as a short squeeze, BBBY was worth just $6.5 billion.
While other meme stocks, like GameStop (NYSE:GME) and AMC Theaters (NYSE:AMC), took advantage of their fame to recapitalize, BBBY already had its plan in place. It sold its Cost-Plus World Market chain to private equity. It was the fifth store divestiture of 2020. The chain is also closing 100 of its flagship stores.
Bringing in Target Wisdom
The savings are going into remodeling the remaining stores, which has begun in Houston. But it’s going to take time. The chain expects the remodeling to be done in just 450 units in three years. The old stores piled products to the ceilings in sections representing various rooms. The new stores are less crowded and place compatible products together in uniform room “looks.”
As operations and appearances improve, the second phase of CEO Mark Tritton’s plan is taking shape behind the scenes. Tritton, formerly chief merchandising officer at Target (NYSE:TGT), has hired a new executive team. He plans to begin launching high-quality store brands in place of the discounted national brands that were previously the focus.
The result is that even as sales decline, profits should increase. Revenue peaked at over $12 billion in 2019 but should be less than $10 billion this year.
It’s a multi-year plan with a good track record at other stores, which is why I’ve owned the stock twice in the last year. But early results have been sloppy, hitting the shares, which is why I sold the first time. Then the Redditors gave me a fat profit, so I sold again.
The Bottom Line
You don’t have to rush back into Bed, Bath & Beyond stock.
Tritton’s plan will take years to play out. Selling extraneous chains cuts sales volume. Remodeling will antagonize some old customers before the new ones show up. The marketing and execution need to be solid for this to work.
I happen to think it will. Tritton helped transform Target. He knows what he is doing.
In the near term, shares may fall further. The current stock price is stretched based on recent results. But the fundamentals are in place, even if the big blue coupons are gone. The rebuilding is proceeding on schedule. If you can catch BBBY below $25, I consider it a good speculation.
Just be prepared to wait a few years. I think patience will be rewarded.
At the time of publication, Dana Blankenhorn owned no shares (directly or indirectly) in any companies mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.
