2 Reasons to Be Optimistic on Bed Bath and Beyond Stock

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Shares of struggling home merchandise retailer Bed Bath & Beyond (NASDAQ:BBBY) tanked in early January after the company reported miserable third-quarter numbers that missed everywhere. And BBBY stock immediately felt the effects.

2 Reasons to Be Optimistic on Bed Bath and Beyond Stock

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Comparable sales dropped more than expected. Revenues came in below estimates. Gross margins compressed. Expense rates rose. Profits missed by a mile, as the company turned in a wide net loss for the quarter when analysts were looking for a narrow profit. Management also pulled its forward guidance amid huge operational changes.

In response to the flurry of bad news, BBBY stock crashed more than 20%.

Despite the plunge, though, there’s reason to be optimistic on a Bed Bath & Beyond turnaround as we go deeper into 2020. Also, there’s reason to be bullish on BBBY stock bouncing back from this crash.

Why? Because new management. The company is now led by new CEO and retail turnaround expert Mark Tritton, who is taking all the right steps to stabilize this sinking ship. Early data suggests that these steps are working. And assuming that these steps keep working in 2020 against a budding economic backdrop, Bed Bath & Beyond’s sales and profit trends could finally start to stabilize.

Such stabilization could provide enough firepower to shoot Bed Bath & Beyond stock up towards $20. Consequently, while the rest of the market is hurriedly selling BBBY stock, I think it may actually be time to start buying.

The Quarter Wasn’t That Bad

The headline numbers in Bed Bath & Beyond’s third-quarter print were awful. Comparable sales dropped 8.3%, marking the biggest drop in recent memory. Revenues declined 9%, also the biggest drop in recent memory. Adjusted gross margins compressed more than 80 basis points. The adjusted operating expense rate rose more than 100 basis points. What was a narrow profit in the same quarter a year ago, turned into a wide loss this quarter.

But, underneath those awful headline numbers, there were some positive data-points which offer a glimmer of hope that Tritton and company are off to a good start in their turnaround plan.

First, the 8.3% comparable sales drop is partly due to holiday timing shifts. Ex those timing shifts, comparable sales were down only 3.6% in the quarter; This would mark the least negative comparable sales drop this year. Second, thanks to certain initiatives management took, Bed Bath & Beyond’s Black Friday through Cyber Monday weekend comparable sales were up 7.1%, including a double-digit increase in the digital channel.

With that said, there’s reason to believe that these early positive trends will persist as we head deeper into 2020. Why? Mostly because management is doing everything right to turn things around. They are expanding the company’s omni-channel capabilities, starting with a full roll out of “Buy-Online, Pick-Up-In-Store” capability in the first half of 2020.

Also, they have partnered with NPD to employ smarter, data-driven pricing and assortment curation strategies. The new management team also plans to double down on loyalty programs and perks, and right-size the store base and use proceeds to invest back into current store refreshes.

Those are all the right moves, and as such, Bed Bath & Beyond has a reasonably good chance to stabilize and improve sales and profit trends in 2020.

Bed Bath & Beyond Stock Could Rebound

If the company does stabilize and improve its sales and profit trends over the next few quarters, then BBBY stock could rebound in a big way from the third quarter earnings plunge.

The numbers are pretty easy to follow here. Competition will forever keep Bed Bath & Beyond from turning into a big-growth company. But, the aforementioned turnaround initiatives do give the company a realistic opportunity to turn into a 0% to 1% revenue grower over the next few years. This would come as the company sustains relevance in the steady growth houseware and home goods market.

At the same time, data-driven pricing schemes coupled with real estate optimization and cost discipline should drive gross margin improvements and expense base reduction. On top of renewed revenue growth, that could lead to sizable profit margin expansion.

Assuming so, my modeling puts Bed Bath & Beyond’s 2025 earnings per share (EPS) at $2.50 (for what its worth, the consensus 2021 EPS estimate sits at $2). At that point in time, Bed Bath & Beyond will be a mild revenue and profit grower. The last time Bed Bath & Beyond featured that growth profile was in the first half of the 2010s. At that time, BBBY stock fetched a forward earnings multiple that averaged around 11.

Based on that forward multiple and a 10% annual discount rate, $2.50 in 2025 EPS implies a 2020 price target for BBBY stock of nearly $20. That’s where shares will trend if the company does successfully stabilize sales and profit trends throughout the balance of the year.

Bottom Line on BBBY Stock

Bed Bath & Beyond stock plunged on awful third quarter numbers. But, underneath the awful headline numbers, there were some positive data-points in the report, the sum of which implied that management’s turnaround initiatives — which are very good — are starting to work.

If they continue to work and drive sales and profit stabilization over the next few quarters, then BBBY stock will rebound in a big way from this selloff.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

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