Bed Bath & Beyond (BBBY, Financial) reported comparable store sales falling 0.6% year over year on Sept. 26. Expectations were for a gain of 0.4%, with revenue ($2.94 billion) and operating profit ($78.9 million) coming in light. The stock has dropped 25% since that call and is about to fall through its 52-week low, which would put it close to 20-year lows. It hasn't been this cheap since the turn of the century.
This latest quarterly report was bad. Very bad, But, while sales have slowed, the company still generated a profit, albeit a smaller one. There is definitely cause for alarm, as the net earnings fell to $48.6 million from $94.2 million in the same period last year. The company does still expect to earn about $2.00 per share for the full year and says that "it's on track to moderate declines in operating profit and EPS this year and next, and to reach growth in EPS by fiscal 2020."
It has $826 million in cash, only $1.5 billion in long-term debt and a book value of 21.36, more than $7 higher than its current trading price. The bad news is that Bed Bad & Beyond spent too much money propping up the stock through share buybacks instead of figuring out how to drive financial performance via online retail. Now, the company is forced to get its act together. Thankfully, it has enough capital to give it enough runway to do it.
Management isn't just sitting around either. The company is looking to open 40 next generation stores by spring 2019. It has done a solid job optimizing inventory to scale winers and shrink total inventory for better turnover. Competition has increased, but Bed Bath & Beyond still holds roughly a 10% share of the $100 billion market for domestic home furnishing. That market is still growing, and people will continue to want newer items for their homes as well as need to replace others. The problem with retail is and will be that you have to visit the store to buy something. Bed Bath & Beyond has to figure out what Amazon did 20 years ago. Consumer desires are all that matter and a retail company's job is to make shopping easier and faster.
Bed Bath & Beyond has a membership of its own, which the company expects to pass 1 million users by the end of 2018. The membership is $29 a year and gives customers 20% of their purchase every time with free standard shipping. This is not good enough. Also, I get two to six coupons for 20% off every month, and free standard shipping is a minimum baseline requirement for being in business at this point.
Investors have only to look at the adjustments Walmart has made that are paying off massively. It offers free two-day shipping without a membership, or same-day pick up from your car at the curb. When you have the real estate, put it to better use. Discounts alone won't drive financial growth.
Big money managers haven't abandoned the stock entirely, with Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) continuing to buy based on the latest 13F filing. Yet none has more than 1.0% of his assets under management in the company's stock.
What's apparent is that the market expects bad news to continue. Over 25% of the float is sold short, and the current price multiples are all well under the company's five-year averages. All it might need to do is show stabilized sales and slight earnings growth to have the earnings multiple jump back to 11x, which would put the stock at $20 to $22 a share if the earnings come in as expected. This is a price where investors can continue to build a longer-term position.
Disclosure: I am not long/short any stocks mentioned in this article.
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