Bears Better Beware A Snapback In Bed Bath & Beyond

We recently embarked on research to find companies that would be considered a value. Analyzing the data from our StockMetrix app, Bed Bath and Beyond (BBBY) kept popping to the top of our list. Yet, with sentiment so bearish and last quarter’s results coming in terribly, is it really a value?

Investors decided that they’d rather park their money in cash and leave BBBY for dead. The stock has taken a nose dive from $80 in 2015 to below $15 today. That’s pretty remarkable given that the company’s revenues are a touch higher today. So why the massive decline?

Analysts point to the company’s inability to stem the erosion in margins. Even with higher revenues operating income halved from just a year ago as did net income. Management seems to be somewhat complacent about the decline in profits. They continue to stick to their guns on their investments and turnaround strategy.

Source: Morningstar

Despite the massive selloff, bears in the stock need to slow their roll. Right now the company is priced as if it’s heading the way of Sears (SHLD) and J.C. Penny (JCP).

Online Sales Continue To Skyrocket

Bears point out that same-store sales continue to erode at Bed Bath & Beyond, which declined 60 basis points vs. 2% the prior quarter. However, no one points to the fact that E-Commerce sales continue to not only grow but make up a larger portion of total sales each year.

Source: Emarketer

Online sales now account for 16.1% of total revenues TTM and 18.3% from Q1. Every quarter the company has grown its online business by 22%+. Hate the physical store all you want. At some point soon the company’s digital footprint will turn the corner for their business. When you consider that companies like Williams Sonoma (WSM) make over half their sales online, you can see pretty quickly where the company can grow.

Source: Morningstar

Bears & Management Overstate Couponing

A considerable portion of the company’s decline in margins stems from a rise in SG&A costs. Bears believe that the heavy amount of couponing is killing the business. Everyone knows about the vast couponing that the company promotes and has known for years. The company didn’t suddenly get a massive influx of coupons that both drove down margins and is expected to continue. Rather, the company is experimenting with getting the right mix of marketing, technology, and personalization.

The company is currently investing in Beyond+, a way to increase customer service and experience. Their focus is as follows:

• 20% off entire purchase every time you shop (standard coupon exclusions apply);
• Free standard shipping — with no minimum purchase;
• Access to special offers and promotions throughout the year;
• Easy to sign up and use;
• $29 annual fee.

With the following results:

• Shopping 2.5-times more than our average customer.
• Generating 4-times higher revenue than our average customer.
• BEYOND+ membership expected to be around 1 million by December 31, 2018.

Management stated this program cost the company 40 basis points in margin for the quarter. When you strip this out, margins were down 20 basis points, which is a marked improvement.

Relative Price Makes It Cheap

One of the top reasons that Bed Bath & Beyond kept coming to the top of our search came from its relative value to peers.

Being a niche retailer takes a lot of work these days. Many of the traditional brick and mortar formats struggle to keep revenues growing along with maintaining margins. Consider the following comparison of BBBY vs. several peers:

Source: Charles Schwab

Restoration Hardware (RH) saw declines in their margins from 2016 to 2017, going from 35.7% to 31.8%. Did their stock tank? Of course, it did. The company’s shares fell from $100 to below $35. Earnings had dropped to around $0.13 per share. They did recover margins within a year, and share prices soared past their old highs.

Right now BBBY still holds nice $2.83 per share, and even with some erosion, will be in the single digits. The price to forecasted earnings estimates it is trading at 7x earnings. The Price/Sales TTM sits at 0.16. Fossil (FOSL), who hasn’t turned a profit in over two years and has significant declines in revenue and margin, still trades at 0.38.

What’s probably the most astounding is the price/tangible book. Investors essentially have deemed Bed Bath & Beyond to be worth less than its tangible book value. That’s in-line with J.C. Penny, who is staving off bankruptcy, and the large banks after the financial crisis.

Make No Doubt, Management Is Incompetent

It’s worth pointing out where the bears are absolutely right.. Management has no handle on things at the moment. The company invests in the areas they need and knows their customers. But, they either seem willfully ignorant or downright incompetent in their discussions with investors.

The following exchange boils it down pretty well:

Michael Lasser — …we saw acceleration in the degradation of your gross margins in the quarter. It will be very helpful to articulate why that was, so we can understand how it’s going to get better from here.

Robyn D’Elia — … Sure. So, the main drivers for gross margin in this quarter were the increase in coupons, a decrease in merchandise margins, and an increase in our net direct-to-customer shipping expense…

The call later discusses how the Beyond+ program works on these margins. However, the entire conversation is riddled with management’s inability to answer basic inquiries as to what’s going on.

Size Your Position Right, and You’ll Be Rewarded

The company’s performance of late has been terrible. Management looks as inept as ever. Yet, if you think that Bed Bath & Beyond is about to go bankrupt, you might be on the wrong end of a short squeeze. Short interest in the company grew from 4.5 days to ~10 days currently. Compare that to RH with 2.5 days to cover. Nearly 23% of BBBY shares outstanding are being held short. Any good news even in the company will force a squeeze that could send the stock soaring double digits in days.

Pick your spot and size your position with this stock. It could easily drop another 10%, 20%, or more. Have some faith in capitalism that either management will see the light or be replaced, and all will be righted with the company. A turnaround here could be a five-bagger in a matter of years.

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