Bed & Bath, Not Beyond Hope

In this episode of MarketFoolery, host Chris Hill talks with analyst Abi Malin about some recent business news. Costco (COST 0.77%) popped on better-than-expected results, and its long-term outlook is bright. Bed Bath & Beyond's (BBBY) long-term picture is less clear, but its prospects are better than they have been in a long, long time. Can new CEO Mark Tritton turn it around before the company crumples? And, Chris and Abi respond to a listener question: How should investors think about investing in feelings, especially when it comes space travel forerunner Virgin Galactic (SPCE -2.83%)? Is Virgin Galactic the new Tesla? Would you rocket off to space with four strangers? Listen to find out more.

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This video was recorded on Jan. 9, 2020.

Chris Hill: It's Thursday, January 9th. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, the one and only Abi Malin. Thanks for being here!

Abi Malin: Thanks for having me!

Hill: We've got some retail news. We're going to dip into the Fool mailbag. Let's start with Costco. Same-store sales for Costco in December up 9%. That is 2% higher than Wall Street was expecting. No surprise, shares of Costco up a little bit today. That's a nice start to the fiscal quarter.

Malin: Definitely. The net sales for December were actually $17 billion. That's actually up 10.5% over last year's results. Really fantastic quarter for them.

Hill: We talk all the time about, when it comes to retail, the holiday season is so important. I think of Costco as just a year-round retailer. I don't think of --

Malin: Christmas gifts.

Hill: Yeah. Even though I know they have that. But I don't think in terms of, "Boy, they'd better nail it in December." But they did.

Malin: Yeah. I think the standout here was really the e-commerce segment. That was up about 43% in the past five weeks. Notably, 20% points of that was attributable to Black Friday and Cyber Monday. That's your big technology purchases, so your computers, your TVs, things like that. I think those purchases come at opportunistic moments for people. So, when you see big sales, you can expect that Costco is going to be taking part in that.

Hill: Shares of Costco are basically $300 a pop. I'm curious if you think this is an expensive stock. Certainly on the surface, even investing as long as I have been investing, if I see triple digits in a stock price, my gut reaction is always like, "Whoo boy." Is this an expensive stock? Or does this still have room to run here?

Malin: To begin with, I never actually think about stock prices on a per-share price. You want to look at market cap instead, just because market cap represents the entire size of the company, and a share price represents a slice. So, depending on how you slice the pizza, it could be greater or less than, but it doesn't actually signify anything specifically for the company. Costco is a $132 billion company, which is very large. But I think when you look at their retail dominance and their everlasting staying power, I think they strategically are very well-aligned for the future.

Hill: You're thinking about the stock price in a much smarter way than I am. Let's move on to Bed Bath & Beyond. Shares down nearly 20% today. Third quarter results for Bed Bath & Beyond were bad, and --

Malin: Very bad. 

Hill: [laughs] You know what? Let's go into the results first. What they did with the guidance is the thing that I find a little surprising. Tell me about the quarter.

Malin: They achieved sales of $2.8 billion, which was an 8.3% comp sales decline, which is just tragic, especially when you consider the downward trend that they've been on. It's just not what you want to see here.

Hill: Bed Bath & Beyond withdrew guidance for the remainder of the fiscal year, which is never a good sign. There's never been a time when a company says, "We think this is going to be so amazing. We just want to surprise everyone at the end of the fiscal year."

Malin: It's always going to be a negative surprise, so they just took it off the table in general. Yeah.

Hill: It seems like the latest power move by Mark Tritton, who's been CEO since the beginning of November -- so, he hasn't even been running the company for this entire quarter -- I don't know, it seems like it's very much his company, even though he just got there, because he was the one, clearly, who pulled the guidance for the rest of the year. And he was very blunt about how dissatisfied he was with these results.

Malin: Yeah, his opening statement was, "Let me be clear, these results are unsatisfactory." And then he continues. I think it's very clear that he's not happy. I do think his strategy, and his clean sweep and new approach, bottoms up -- they did this whole deep market research into Bed Bath & Beyond that they talked about a lot in the quarter. They're really starting from ground zero here. And I think if there was ever a time to do it, now is the time. He's new, he has things to prove. The company is already on a downward trajectory, so it's time to hopefully get it moving back in the right direction. So, I actually think his negativity was reassuring and a little bit positive for this company.

Hill: Absolutely. I'm not a shareholder, but this is the most interesting this company has been in a long time. Even with this drop today, it's still up roughly 80% from the low it hit last summer. I was going to talk about the stock price, but given what you said about Costco, let's talk about the market cap. Bed Bath & Beyond is just a $1.7 billion company. Is it crazy to think that if Mark Tritton gets his way and implements the changes that he wants to see, this thing could double in the next year and a half, two years? We're just talking about $1.7 to $3.4 billion.

Malin: Right. I don't actually think that would be insane. I think you would need to see a lot of positive momentum for that to happen, though.

Hill: There will absolutely be people today -- I'm one of them -- who looked at this and thought, "Boy, 20%? I think I believe in this CEO. Maybe I should buy some shares because they're 20% cheaper." It sounds like you're saying not yet. Like, pump the brakes before you just jump in and buy today.

I mean, for the positive side, I would say, the things that they do have going for them, they're No. 1 in brand awareness for housewares and home goods, and a pretty strong leader in bedding and bath. Generally, people have a favorable impression of this brand. 79% of customers report feeling positively. And they're starting to acknowledge really big, significant strategic downfalls that they have. There's a lack of clarity around purpose and value. They talk about a softer connection with millennials and Generation Z, and the fact that their entire digital footprint is really lacking. I think admitting a problem is the first step to correcting it. So, I think that is positive for this quarter for them. We are admitting the problems. I just don't know. They have pillars, but there's no tangible steps taken yet, and I'm not quite sure what those look like. So, even if, maybe it'll happen slower than analysts want, but I would just wait to see exactly what that plan is.

I think the other thing to think about with Bed Bath & Beyond is, they actually own a variety of brands within Bed Bath & Beyond. They own ... Cost Plus World Market is the full name, but World Market is what people call it. And, Christmas Tree Shops, and a variety of others. I think there's some cleaning out that needs to be done. Those are giant sales footprints, and generally not very differentiated from competitors. So, I think there's a lot to be done here before we can say this looks like a bargain.

Hill: Yeah. Thank you for reminding me of that. I always forget that about Bed Bath & Beyond, that they do actually have these other brand concepts. If anyone at those locations, or management of those businesses -- let's just remove all doubt that absolutely everything is on the table with Mark Tritton. To your point, it should not shock anyone if part of the change he wants to implement is slimming down and shedding some of these brands.

Our email address is [email protected]. Question from Brandon Dobbs in Virginia. Brandon writes, "My question is about the role a feeling should play in investing. Specifically, I'm wondering about your thoughts on investing in a company like Virgin Galactic. As an amateur, I'm looking at the stock thinking it's bound to go way up, and I'm wondering why it wouldn't be a good idea to buy into a company like this at the beginning while the stock price is low if you can afford to take the risk, as the rewards could be astronomical, no pun intended." You know what? It's a great question, but I think Brandon's pun actually was intended there. We're talking about a space company, Virgin Galactic, which was spun out of Virgin Group last year. I'm not saying there's not a bull case to be made, but I think right out of the gate, the fact that through the first nine months of 2019, Virgin Galactic had very little in the way of revenue and lost somewhere in the neighborhood of $140 million, it's like, we'd like to see some more people actually paying for space tourism, probably.

Malin: [laughs] That's funny. I was not expecting you to have that perception of this company, actually.

Hill: Really?

Malin: Yeah, no. I feel very positively about Virgin Galactic, actually. They are the first publicly traded human spaceflight company. That is their deal. It was founded by Richard Branson in 2004, but their current CEO is George Whitesides, who previously served as chief of staff for NASA. So, I think there's a lot of very intelligent, smart people behind this initiative. I'm scared to make this comparison, because I know it's going to get torn apart, but I do think with this company, you're seeing a little bit of like ... here we go, a Tesla sort of comparison. Before Tesla really had cars on the ground and things going, they talked a lot about commitments and accepting deposits before the cars were going out. And there were a lot of questions about feasibility, and is it possible, could it ever happen? I think with Virgin, we're still in that very, very early Tesla phase of a company. There is a demonstrated demand here. They sell 90-minute space flight plus training for about $250,000 a person. At a 65% profit margin and five passengers per flight, we're looking at about $800,000 in profit per flight. And they do have over 600 reservations booked. They've collected $80 million in deposits. This is all notable because generally speaking, there is some sort of demand here.

But, going back to the question about, should you invest in a feeling? At this point, this is such a nascent market, and we're so early in space tourism, that there's really no way to say what that market looks like. So, this person is really no better or worse off than anybody else who happens to be buying shares of it. I think he's thinking about it correctly when he says, "if you can afford to take the risk." It's really not about knowing exactly where this company is going, because that's physically impossible at this point; but just making sure that you moderate your risk to match your portfolio. If you are going to take an investment in something like Virgin Galactic, I would recommend a very, very small position size relative to your overall portfolio.

Hill: I absolutely agree with all of that. I think that particularly the younger you are -- not to say that people my age and older shouldn't have a little part of their portfolio allocated toward, "I'm just going to run with this. Maybe it pans out, maybe it doesn't." I just think that the ... [laughs] I don't think your Tesla comparison is a crazy one.

Malin: It's not that I think it's crazy; I think it's going to make a lot of bulls and a lot of bears and it's going to leave no one neutral in this room. So, apologies, or you're welcome, depending on who's listening.

Hill: You know what? It's just you and me in this room. I would simply say that the total addressable market is smaller than Tesla's total addressable market, because not everybody has a quarter of a million dollars burning a hole in their pocket. And even the people who do, then you're looking at, raise your hand if you want to spend that money on going to space. I don't know, I feel like if I had that kind of money --

Malin: That's not how you'd spend it?

Hill: I don't think so. Yeah, I wouldn't spend it that way.

Malin: I think, though, the thing to remember is that space tourism becoming a viable vacation option for people is one of multiple revenue streams that they could potentially tap. They could also sell to academic institutions who want to conduct research. They manufacture their own parts, so they could become a space parts supplier. And space travel could eventually, in the very, very long term, replace long-haul airplane flights. So, I think there is optionality here, maybe a little bit more than people are initially giving them credit for. With that being said, again, very young stage, very early, very speculative at this point, I would call it. But certainly interesting.

Hill: Would you do this?

Malin: Take a flight to space?

Hill: Yes.

Malin: Absolutely.

Hill: You would?

Malin: Yeah. Why would you not? That's insane. I also have my scuba license, though, so I'm not for the faint of heart.

Hill: No, no, you've never struck me as someone who's faint of heart. Maybe I'm focusing on the wrong thing here, but the whole -- do they take five people at a time? Or five other people? Do six people go up at a time or five?

Malin: Five passengers.

Hill: Do I get to choose the other four? Because that's going to matter to me.

Malin: Unclear. I'm not sure about that.

Hill: Would you go if you didn't get to choose the other four?

Malin: Yeah, because only a certain kind person is going to elect to put themselves in the situation, and I want to meet all of them.

Hill: We'll end there. Abi Malin, thanks for being here!

Malin: Thanks for having me!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday.