Bed Bath & Beyond: This Might Be The Turnaround (NASDAQ:BBBY)


Since 2017, Bed Bath & Beyond (BBBY) is not part of the S&P 500. But if the stock would still be part of the S&P 500, it would have been by far the best-performing stock during the last six months. Since April 2020, BBBY’s stock price increased an impressive 443% and would have been a fantastic investment as the S&P 500 increased “only” 35.5% (which is still a very good performance). When looking at the impressive performance during the last six months, we also have to see what happened before. Since 2014, Bed Bath & Beyond was a disaster for its shareholders and the share price declined 95% until March 2020 when the stock hit its temporary low so far.

Data by YCharts

In the following article, we look at the last quarterly results as well as the turnaround strategy of Bed Bath & Beyond. Following that we also look at the balance sheet, the risks the company is facing right now as well as the technical picture.

Business Description

Bed Bath & Beyond is a retailer that is selling domestic merchandise and home furnishings and in the last few years it was one of the companies in the retail sector that suffered especially hard from the ongoing shift towards e-commerce – problems that were also reflected in the above-mentioned stock price decline. And in the first quarter of 2020 (March till May 2020), the company was also hit hard by COVID-19 which resulted in sales declining 50% YoY and the company reporting a negative EPS of -$1.96.

But in the second quarter, Bed Bath & Beyond surprised the investing world with earnings as well as revenue topping analysts’ estimates. Sales still declined 1.1% compared to the same quarter last year, but considering the 50% decline a quarter earlier this is quite solid. Bed Bath & Beyond also reported comparable sales growth of 6%, which is not only a solid growth rate, but the first quarter with comparable sales growth since 2016. We especially have to point out the strong digital comparable sales growth of 89%, which is a good sign that the company is finally moving towards e-commerce. Sales from the digital channels represented about one third of total sales in the last quarter.

(Source: BBBY Q2/20 Presentation)

Bed Bath & Beyond could also increase the adjusted gross margin as well as the operating margin with the improved gross margin stemming from a more favorable product mix, with lower coupon expenses and better optimization of promotion and markdowns. When looking at the bottom line, the company could also report a net income of $218 million compared to a loss of $139 million in the same quarter last year. This is resulting in an impressive EPS of $1.75.

But we also have to point out that BBBY reported adjusted net earnings per diluted share of $0.50. It is important to point out that the $218 million in net income stem in part from gains from the extinguishment of debt ($77 million) and also the sale of PersonalizationMall.com, which was completed in early August (with net proceeds of approximately $245 million). I am usually very cautious about using adjusted earnings per share, but in this case the non-GAAP number probably reflects the business better and the adjusted EPS is still the strongest number Bed Bath & Beyond could report in over two years. During the quarter, BBBY could generate more than $750 million in cash – about $543 million in net cash provided by operating activities and $245 million from the sale of PersonalizationMall.com.

Turnaround Strategy

At this point, nobody can deny that Bed Bath & Beyond is in serious troubles and was losing out to competitors in the last few years – which was reflected in lower sales and the company not even being profitable in several quarters. In the case of BBBY, it basically comes down to the question of whether the company can manage the turnaround.

And while time will have to tell if the strategies of the company will be effective, management is definitely trying hard to work on the turnaround by using several different strategies and trying to optimize the business in every possible way. This is starting with a new management team that has a lot of experience after working with many different retailers – including CEO Mark J. Tritton, who worked at Target (TGT) before, one of the retailers that managed the transformation extremely successfully.

(Source: BBBY Q1/20 Presentation)

When looking at the strategies, we also see some that are familiar and strategies that already worked very well for Target. Similar to Target, Bed Bath & Beyond converted about 25% of its stores in the United States and Canada into regional fulfillment centers and therefore nearly doubled digital fulfillment capacity. The company also introduced “buy online and pick up in store (BOPIS)” – another strategy we know from Target and that seems to be successful for BBBY as it was for Target.

Bed Bath & Beyond could increase the percentage of digital sales from 18% in the second quarter of 2020 to 32%. The stores have filled about 36% of the total digital orders in the second quarter (this includes the ship-from-store capability) and these expanded fulfillment capabilities also had a positive effect on the company’s gross margin.

(Source: BBBY Q1/20 Presentation)

Aside from these strategic shifts, the company is also doing what many other companies that are facing troubles are doing. Management is trying to reduce expenses. Bed Bath & Beyond announced that it will reduce its workforce by about 2,800 people (representing about 5% of the workforce) across corporate headquarters and retail locations. The company already closed several stores in the past few months and is planning the closure of about 200 mostly Bed Bath & Beyond stores (about 15% of all its stores in the United States and Canada) over the next two years, which should generate about $100 million in annual savings. As mentioned above, the company is also selling off assets like the recently completed sale of PersonalizationMall.com for $245 million and management is expecting the sale of further non-core assets.

(Source: Q2/20 Presentation)

I don’t think we will wrong BBBY’s management (especially in the past few years) when stating that BBBY is very late to the party and the risk of “too little, too late” is extremely high. We will have to see if the new strategies to increase sales will work in the coming quarters, but the second-quarter results should make us optimistic.

Financial Health

Aside from the question, if BBBY can manage the turnaround, a look at the financial health of the company is also extremely important. On August 29, 2020, the company had $1,442 million in cash and cash equivalents, which should provide enough liquidity for management to navigate the next few quarters if the situation should get difficult again and stores have to be closed again due to the pandemic. And after massive impairment charges in previous quarters, the company doesn’t have any goodwill or intangible assets on its balance sheet, which is also a good sign. The company also stopped paying a quarterly dividend to preserve capital, which will improve the financial situation of Bed Bath & Beyond.

When looking at the liabilities side, the company has $1,190 million in long-term debt. Compared to shareholders’ equity of $1,697 million we get a debt-equity ratio of 0.70, which seems acceptable. Cash and cash equivalents would be enough to repay the outstanding debt and with the operating profit of the last quarter, it would take only four quarters to repay the outstanding debt (of course, the last quarter was exceptionally good). During the last quarter, Bed Bath & Beyond could also reduce the gross debt by over $500 million from about $1.7 billion at the end of the first quarter.

Risks

Although I would call the balance sheet rather solid, BBBY is facing several risks. One of the major risks is the ongoing pandemic. We simply don’t know how the pandemic will play out over the next few months. We don’t know if and when a vaccine will be found. There might be another lockdown or people might stay at home without a state-ordered lockdown due to the fear of getting infected. It was a great sign in the last quarter that Bed Bath & Beyond could increase its online sales. Increasing e-commerce operations will help, but the next two quarters during the fall and winter might be worse than the previous quarter.

Aside from the negative effects of COVID-19, it might also be possible that BBBY doesn’t manage the turnaround. Although BBBY is trying a lot of different strategies that have worked for other retailers like Target, we have no guarantee that these strategies will work for Bed Bath & Beyond. And like most other retailers, Bed Bath & Beyond is facing tough competition and is still operating in a low margin business and therefore, we have to be cautious.

Technical Picture

When looking at the fundamental aspects presented above, we have some hints for a successful turnaround and the technical picture is also indicating that Bed Bath & Beyond might have found its bottom. If the stock manages to stay above the previous high at $17.50, I will argue that the downtrend of BBBY might be over and the pattern of lower lows and lower highs is broken. The stock also broke another high at around $19.30 that was set in early 2019. The stock could also overcome a declining trendline that is in place since 2017 (green dotted line) and was tested several times in the following years. And last week, BBBY finally broke out above this trendline.

(Source: Traderfox)

Right now, the stock is hitting the 200-week moving average and after the strong run a pullback seems likely. But when looking at the big picture, we can be optimistic that BBBY (the stock) might have managed the turnaround from a technical point of view.

Valuation And Intrinsic Value

We have the combination of an improving fundamental picture and an improving technical picture – both are bullish for the stock. But in our analysis, there is at least one component missing – the current valuation of Bed Bath & Beyond, as otherwise it is quite difficult to decide if the stock is a good investment at this point or not.

In March 2020, BBBY was trading at extremely low valuation multiples. Retailers always have a low price-sales ratio due to the low margins, but a price-sales ratio of 0.05 in March 2020 was ridiculously low. Due to negative earnings per share it doesn’t make much sense to calculate a P/E ratio at this point.

ChartData by YCharts

While earnings per share were negative in the recent past, free cash flow was positive – at least at an annual basis. And when looking at the free cash flow of the last twelve months, Bed Bath & Beyond could generate $252 million in FCF. When we take the free cash flow of the last four quarters and assume that the company will be able to generate a similar FCF from here till perpetuity, it would lead to an intrinsic value of $20.32 and make the stock fairly valued (using a 10% discount rate). This scenario basically means that management can stop the decline of the business that was going on for several years, but it also means that Bed Bath & Beyond won’t be able to grow again – and that is a scenario I consider rather unlikely. When we assume a moderate growth of 3% in the years to come, the stock would be fairly valued at around $29. And considering the strategic initiatives of the new management team as well as share buybacks, a modest low single-digit growth rate should be realistic.

Conclusion

I was already cautiously optimistic about Bed Bath & Beyond last October when the stock was trading at around $10 and now – about one year later – I would still be optimistic that Mark Tritton and his new team will manage the turnaround and make the company profitable again. With the stock market giving BBBY also credit, I will stay bullish for the long run and continue to hold Bed Bath & Beyond although it continues to be one of my worst investments. As I already mentioned in my last article, I would not buy Bed Bath & Beyond any more as it is not the kind of company I want to invest in for the long run, but I don’t see reasons to sell the stock either.

Disclosure: I am/we are long TGT; BBBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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