Bed Bath & Beyond (NASDAQ:BBBY) is looking fit and trim these days. With the recent sale of Cost Plus World Market, the home decor retailer shed yet another non-core asset, along with a distribution center in New Jersey.

What's left is a tightly focused business zeroing in on home, baby, and health and wellness, showing CEO Mark Tritton has proven adept at getting the retailer to prioritize what's necessary to survive.

But while Bed Bath & Beyond's stock has nearly doubled over the past six months, the home goods retailer still faces significant headwinds, and further gains are far from certain.

Woman looking at housewares

Image source: Getty Images.

A new sense of purpose

Bed Bath & Beyond was on the verge of irrelevancy before activist investors ignited change at the retailer. They brought Tritton on to clean house at the same time the home-goods store embarked on becoming a leaner operation.

Half of its real estate was sold off in a sale-leaseback arrangement, and the retailer leaned into its newfound purpose in digital sales -- just in time, it turns out, as the coronavirus pandemic took hold.

The COVID-19 crisis caused the retailer to rely on its e-commerce platform, and its most recent quarterly earnings report in October shows the strategy paid off. As people used their time at home to spruce up their interiors, comparable sales from its digital channel jumped 89%, allowing Bed Bath & Beyond to post its first quarter of comps growth in four years.

The retailer also said it was lowering prices and introducing a number of private-label brands to help counter consumer perceptions that it's an expensive store to shop in. Although its ubiquitous 20% blue-and-white coupons were popular, they were also margin killers, and any attempt at scaling back their distribution led customers to avoid its stores. Bed Bath & Beyond isn't doing away with them, only being more judicious in their use.

Making up for lost time

That points to a path forward for the retailer, but it also raises its own set of concerns. J.C. Penney was known for its doorbuster sales, and when they were eliminated in exchange for an everyday low-pricing policy, its customers rebelled.

Bed Bath & Beyond could encounter a similar mindset among its own customers, particularly because they have more options than ever on where to shop for home goods. Amazon, At Home, Target, Walmart, and Wayfair are all aiming for the same customers online and in store, and they have used the time when Bed Bath & Beyond sat idly by to capture many of them.

Also, the tailwinds that fueled Bed Bath & Beyond's recovery during the pandemic won't be around forever. Retail sales in November declined for the second straight month, and even if Washington comes up with a new stimulus package, it's only a one-time shot in the arm. The company needs to persuade customers to keep coming back, especially to its physical stores.

A COVID-19 vaccine will certainly help a return to normality, and since Bed Bath & Beyond is finally playing to its strengths by concentrating on its namesake stores, the buybuyBaby chain, and Harmon Face Value locations, the retailer has its best chance in years of doing so.

Worth the risk

For investors, Bed Bath & Beyond is also a discounted stock. Despite the gains made this year, the retailer trades at a fraction of its sales and just three times the $750 million of cash flow it generated in the fiscal second quarter alone.

Analysts do forecast Bed Bath & Beyond will grow earnings at 90% annually for the next five years, but that can be disregarded as estimates occur when a company is turning from losses to profits. Even so, Wall Street sees the home-goods store finally heading in the right direction.

A lot of risk remains for the retailer, but Bed Bath & Beyond isn't the same company it was even a year ago. Betting on its continued improvement isn't the long shot it once seemed, and buying its stock with eyes wide open to the ups and downs the retail stock will still encounter could be a smart investment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.