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Bed Bath & Beyond Proves It’s Still a Value Trap, Not a Value

By Nicholas Rossolillo – Jan 12, 2020 at 8:50AM

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Shoppers are retreating from the retailer, and investors should follow suit.

The 2019 holiday shopping season is a wrap, and early indications are that the American consumer is not only alive and well but spending generously. Through November, the U.S. Census Bureau reported a 3.2% rise in retail sales over 2018, and initial reports from the likes of Amazon indicate that the busy post-Thanksgiving period could set new records.

There is no such cheer at Bed Bath & Beyond (BBBY -48.63%), though, and it isn't just an inability to get the right formula of digital and brick-and-mortar store presence that's the problem. Though it was late to the e-commerce party when it got serious about pursuing that channel a few years ago, it has made strides in modernizing its selling methods. Rather, it would seem in an ever-competitive retail world, shoppers are opting for merchandisers with a broader assortment of items -- both online and in-store. The company's fiscal 2019 third quarter report proves once again this is no value stock waiting to make a quick turnaround.

There's this one concession ...

First, though, it's worth noting that Bed Bath & Beyond shares had rallied almost 140% at one point from the lows hit in the late summer of 2019. There's been optimism that new CEO Mark Tritton -- former chief merchandise officer at resurgent Target -- will be able to right the ship. Plus, until just recently, the home goods store was still profitable.

A couple moving boxes into a home.

Image source: Getty Images.

That has changed, however, as even Target's former rock star isn't going to provide a quick fix. Third-quarter sales fell 9% year over year, and operating losses steepened to $29.8 million compared with operating income of $49.5 million a year ago. While the results for 2019 to date are somewhat muddied by total impairment charges of $441 million taken so far, results are nevertheless trending in the wrong direction.  

Metric

Nine Months Ended November 30, 2019

Nine Months Ended December 1, 2018

Change

Revenue

$8.05 billion

$8.72 billion

(8%)

Gross profit margin

31.4%

33.9%

(2.5 pp)

Operating expenses*

$2.71 billion

$2.75 billion

(1%)

Net income (loss)*

($107 million)

$117 million

N/A

Adjusted earnings per share

$0.08

$0.78

(90%)

*Excluding $441 million of impairment charges. PP = percentage point. Data source: Bed Bath & Beyond.  

Further clouding the situation is the withdrawal of full-year 2019 guidance. It's a necessary move, given the changes Tritton is making and the uncertainty of the holiday sales picture after the weak lead-up to that important period. Tritton's plan for the future will be forthcoming in the next few months. However necessary, though, stock markets hate the unknown. 

Buyers beware

At this point, with shares having retreated about 15% after the third-quarter report card, Bed Bath & Beyond may appear cheap. Shares trade for just 6.6 times trailing 12-month free cash flow, and just 10.8 times one-year forward earnings. But that forward metric would imply there are earnings to be had, a prospect that is looking increasingly unlikely in the near-term.

Not even a 4.2% dividend yield should be enough at this point. As I've said for some time, money spent on dividends and share repurchases are probably better spent on fixing the slide in operations. And what is that fix? For one thing, differentiation as a hybrid physical/digital home goods store specialty company, and less of an assortment that makes Bed Bath & Beyond a quasi-department store. According to the U.S. Census Bureau, the department store segment of retail is down again this year -- this time falling 5.4% compared with 2018.  

Until it can distance itself from the current situation, the stock still looks like a value trap to me. As the saying goes, things will get worse before they can get better. That's likely to be true for Bed Bath & Beyond if it's to make a real turnaround.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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