Shares of Wayfair (W -5.82%), Bed Bath & Beyond (BBBY -1.62%), and RH (RH -1.77%) were down sharply Wednesday as the past week's market rally came to an abrupt end to start the second quarter. At this writing, the S&P 500 index, a good proxy for the overall U.S. stock market, is down 4.1% on news that manufacturing contracted more quickly than expected in the first quarter, and economic indicators point toward a contraction in April that could be the sharpest in American history.
As a result, retailers that focus on nonessentials are taking a beating, as investors lower their already-low expectations for how these companies will perform in the weeks and months ahead. Here's how our three names above are faring today:
|Retailer||Price Change (Decline) on April 1|
|Bed Bath & Beyond||(7.8%)|
It's about as obvious as it gets that Bed Bath & Beyond, Wayfair, and RH (commonly known as Restoration Hardware) will struggle under the weight of the coming (or likely already started) recession. Nonessential retail stores -- that is, anyplace that doesn't sell food, medicines, or hardware items -- have been ordered to close in most of the country. That has impacted even the online business for these companies, a crucial part of Wayfair's business.
Looking beyond the forced closures, it's almost a certainty that all three retailers would be facing down an ugly environment. Millions of Americans are now out of work, and millions more are expected to join the unemployment rolls, and at record levels. When so many people are out of work as large swaths of the economy essentially close down, the last thing many people think about buying is a new couch or throw pillows.
At this writing, investors have all but turned their backs on companies that make or sell discretionary goods. The next few months are going to be brutal, and not every company will survive.
The pressure is especially heavy for a company like Bed Bath & Beyond, which was dealing with cratering sales and a struggle to return to relevance before the COVID-19 pandemic brought the consumer economy to an abrupt halt. The company just saw its credit rating lowered again this week, and it could be increasingly difficult for it to find lenders willing to extend it any more credit, particularly if the retail freeze remains in effect for months.
The good news is that Bed Bath & Beyond started the year with $900 million in cash, and no debt due in the next year. That should provide a margin of safety it will desperately need. Similarly, Wayfair had almost $1 billion in cash and equivalents at the quarter's start, a substantial cushion to ride out the downturn.
RH, on the other hand, has the weakest balance sheet. It ended the fiscal year (on Feb. 1) with less than $50 million in cash, and has $366 million in debt due within one year of that date. But while Bed Bath & Beyond has a stronger balance sheet, RH's business results have been improving while Bed Bath & Beyond has seen considerable erosion:
That means RH is far more likely to be able to access capital if necessary. Lenders are far more likely to give loans to a strong and growing business than prop up a business in decline.
That's not to say Bed Bath & Beyond won't survive the downturn. I think its balance sheet is strong enough to help it ride out what should be a very brutal next few months, along with RH and Wayfair.
But among the three, RH and Wayfair are far more relevant businesses with better long-term prospects. I think if investors are looking for a beaten-down retailer to buy right now and hold for the eventual recovery and beyond, I'd put both RH -- with its balance sheet risk -- and Wayfair well ahead of Bed Bath & Beyond.
The next few months are going to be painful (perhaps brutally so) for all three companies. But history tells us that investors who buy in the midst of a brutal market, and then hold for the long term, come out ahead.