After years of sales decline and a management overhaul last year, Bed, Bath & Beyond (BBBY) trounced analysts' estimates in the company's second quarter. With prospects finally looking up, is now the time to buy? Let's check it out.

Not keeping up with the times

Bed, Bath & Beyond was once a thriving, big-box home goods retail chain where you could find everything you need to outfit your kitchen, bedroom, bathroom, and more. Huge stores featured myriad products, and there were several options to choose from. But this strategy eventually failed when digital offered easier ways to shop and consumers moved toward more boutique, experiential options. Bed, Bath & Beyond stores, lined from floor to ceiling with products, were bulky, and too many choices per product were confusing for customers. It also had too many promotions, which eroded its premium brand.

Sales began to decline, and the company struggled as it tried to find its place. Activist investors overthrew top management in late 2019, and a new executive team was put in place with Mark Tritton at the top, who came over from Target (TGT -0.70%).

Nicely decorated bedroom.

Image source: Getty Images.

Tritton has been aiming to shed the company's outdated image and reconstruct it in a similar model to Target, which is heavily focused on a broad omnichannel strategy and has had a lot of success with owned-brands. Some of Tritton's goals over his tenure have been to curate a streamlined collection of products, launch more competitive and digitally based shopping options, and build a skilled management team.

Out with the old, in with the new

Tritton created a new executive panel over several months, but sales continued to decline as changes were slow in coming. When the pandemic hit, the company took action and fast-tracked many improvements. There was a strong focus on a better-curated product line and data-driven markdowns and promotions. It laid off 2,800 workers in the second quarter and is cutting store count, closing 200 Bed, Bath & Beyond stores (out of almost 1,000) over the next two years, including one third of those by the end of 2020.

Management moved operations to the cloud to become more agile, and it's using data to enhance the customer experience, improve fulfillment options, and optimize merchandise planning.

The company saw strength in buy online, pickup in store as well as curbside pickup, and it rolled out same-day delivery this past week. 

Comeback quarter

These efforts paid off with a competitive quarter that was much better than expected and the first comps increase since the 2016 fourth quarter. While sales fell 1%, it outdid the predicted 3.3%, and comps were up 6%, rather than the expected decline. Digital kicked in to fuel growth with an 89% increase, and mobile demand was up 133%. The company also improved its cash position with $750 million in cash flow and paying down its debt by $500 million. Earnings per share came in at $1.75, which included the sale of Comps were already positive in June, and sales were a positive 1% in August. Sales continued to trending up into September. The web site enjoyed two million new customers, including 800,000 who are new to the brand, and who are purchasing from higher-margin categories.

There were strong tailwinds in the second quarter ended Aug. 29 since people stayed home and spent their stimulus checks on home improvement. But Bed, Bath & Beyond probably wouldn't have been the recipient of these checks without its total overhaul.

Shares were down year to date as of Sept. 30, but they jumped on the earnings beat and are up over 8% as of this writing. This is an exciting story, and if this does indeed turn into a full turnaround, you can get your hands on cheap shares now before the price rises. But the question is whether or not the company can sustain these developments. Digital only accounted for 32% of sales, which made up for the 12% store comp decline, but in today's world that number needs to move higher. The company is still executing on its plans and expecting improvements. I'd recommend waiting for another positive report before investing in Bed, Bath & Beyond.