Bed Bath & Beyond (NASDAQ:BBBY) has struggled mightily in recent years, unable to keep up with changing consumer habits. Weak store traffic and underinvestment in e-commerce have led to sagging sales, while an inventory overhang and increased promotional activity have weighed on margins.
The home-furnishings icon hired Target veteran Mark Tritton as its new CEO last fall. Even if economic conditions had remained strong, Tritton would have faced a tough task turning Bed Bath & Beyond around. In the current environment, with the COVID-19 pandemic having forced it to close most of its stores, Bed Bath & Beyond's prospects are even worse. As a result, Bed Bath & Beyond stock has plummeted this year.
Nevertheless, Bed Bath & Beyond shares staged a relief rally on Thursday, rallying 18% after the retailer's fourth-quarter earnings report. Investors may have been reassured by the company's big cash position: It exited fiscal 2019 with $1.4 billion of cash and investments. However, that may not be enough to save Bed Bath & Beyond from financial ruin over the next few years.
Another dismal quarter
The downturn in Bed Bath & Beyond's business accelerated throughout its recently ended 2019 fiscal year. Through the first three quarters of the year, sales fell 7.7% to $8.05 billion. Adjusted net income plummeted 90.1% year over year to $10.5 million, while adjusted earnings per share fell to just $0.08 from $0.78 a year earlier.
The fourth quarter was no better. Net sales fell 6.1% to $3.11 billion on a 5.6% comparable sales decline. Furthermore, sales were boosted by a shift in holiday timing, which pushed Cyber Monday into the fourth quarter in fiscal 2019. Comp sales would have plunged 11% year over year, adjusting for the calendar shift.
The weak sales performance -- along with rising shipping costs and a short-term increase in consulting fees -- caused Bed Bath & Beyond's profitability to plummet again last quarter. Adjusted net income fell to $46.9 million from $158.8 million a year earlier, while adjusted EPS plummeted to $0.38 from $1.20 in Q4 2018. For the full year, adjusted EPS totaled just $0.46. As recently as early October, the previous management team was still projecting that full-year EPS would come in between $2.08 and $2.13.
Despite the sharp earnings decline last quarter, EPS was nearly double the average analyst estimate of $0.20. However, analysts had cut their forecasts sharply in February, when Bed Bath & Beyond revealed that comp sales had declined 5.4% and margins had plummeted in the combined December-January period.
The only truly comforting news in the earnings report was that Bed Bath & Beyond ended fiscal 2019 with $1.4 billion of cash and investments on its balance sheet, up from $1 billion a year earlier. Yet while that big cash buffer will help Bed Bath & Beyond avoid financial distress in 2020, it won't solve the company's significant long-term problems.
Store closures are pummeling sales (and earnings)
Bed Bath & Beyond's fourth quarter ended on Feb. 29, so its poor performance had nothing to do with COVID-19. Not surprisingly, sales have fallen off a cliff over the past month and a half. Bed Bath & Beyond closed all but approximately 175 of its 1,500 stores by March 23 and won't reopen them until at least May. Those that remain open operate under the buybuy BABY and Harmon banners and sell essential baby and healthcare products.
On the company's earnings call, management said that net sales plunged 31% in March, even though most stores were open for most of the month. On a quarter-to-date basis, sales are down 42%, implying declines of 60% or more since the beginning of April. While digital sales are increasing, it hasn't been nearly enough to make up for lost in-store sales.
Bed Bath & Beyond hasn't provided any earnings guidance, but it's virtually inevitable that the company will lose money this year: It's only a question of how much. With just 20% online sales penetration and a focus on discretionary merchandise categories, the current store closures and the likelihood of weak store traffic after restrictions are relaxed will decimate the company's business.
Long-term problems remain
While management declared during the recent earnings call that Bed Bath & Beyond would emerge from the current crisis stronger than ever, I am highly skeptical of that claim.
The company's $1.4 billion cash cushion will allow it to make it through the year, but Bed Bath & Beyond also had $2.5 billion of short-term liabilities at the end of fiscal 2019. Between these liabilities coming due and operating losses, the company is likely to burn through much of its cash over the next few quarters without improving its future prospects or addressing its long-term debt.
In addition, Bed Bath & Beyond has postponed much-needed store remodel projects, partly to reduce capex and partly because of timing constraints. (With work unable to begin on schedule, it was worried that construction would disrupt the key back-to-college selling season.) That will delay its ability to develop a more successful strategy for its stores, affecting future results.
Lastly, the majority of the increase in Bed Bath & Beyond's cash position during fiscal 2019 came from the sale-leaseback of over $250 million of real estate. That deal will increase pre-tax net occupancy costs by $11 million annually going forward, with an even bigger increase in cash costs. In short, Bed Bath & Beyond traded higher ongoing costs for a one-time cash infusion.
Bed Bath & Beyond stock is cheap for a reason
At present, Bed Bath & Beyond stock trades at a roughly 64% discount to book value. That big discount might pique some value investors' interest. However, with Bed Bath & Beyond likely to post a big loss in fiscal 2020 and no guarantee of a return to profitability thereafter, book value is set to fall dramatically and doesn't offer a margin of safety.
Quite simply, an investment in Bed Bath & Beyond is a bet on Tritton's ability to turn the company around. Yet customers have been finding fewer and fewer reasons to visit Bed Bath & Beyond stores in recent years, and COVID-19 fears will only accelerate the existing trend of declining traffic. Store remodels, merchandise changes, and e-commerce improvements are all likely to be too little, too late.