Bed Bath & Beyond (BBBY -3.66%) has been a popular recovery stock over the past year. While the home-focused retailer lost money in its recently ended 2020 fiscal year, it has a new management team, and its financial results have already started to improve (albeit modestly).
Those factors have attracted plenty of risk-loving investors. In fact, Bed Bath & Beyond stock has more than quadrupled over the past 12 months, sending it to a multiyear high.
However, Bed Bath & Beyond shares gave up some of their gains earlier this week, dropping 12% after the company released its fourth-quarter earnings report on Wednesday. Considering the long-term challenges the company faces, the stock could have more downside ahead.
A decent quarter
Bed Bath & Beyond's management painted the fiscal fourth quarter (which roughly corresponded to the months of December, January, and February) as a success. Comparable sales grew for a third consecutive quarter, rising 4%. The core Bed Bath & Beyond brand delivered an even stronger 6% comparable-sales gain, as digital comparable sales nearly doubled.
Additionally, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 13% year over year. Adjusted earnings per share ticked up to $0.40 from $0.38 in Q4 of fiscal 2019.
These results certainly weren't terrible. That said, total sales declined compared to the prior-year period, even after adjusting for the sale of several non-core retail brands over the past year. Moreover, the company was facing an easy year-over-year comparison for earnings per share (EPS). In Q4 2019, adjusted EPS plummeted 68% year over year, from $1.20 to $0.38. Just five years ago, Bed Bath & Beyond posted EPS of $1.91 in the fourth quarter.
In short, Bed Bath & Beyond's Q4 results were still poor by historical standards. Management might like to blame the pandemic for that weakness, but industrywide sales of home goods have been growing strongly for most of the past year.
Threats offset opportunities
Looking ahead, CEO Mark Tritton and his management team hope to rebuild Bed Bath & Beyond's earnings power through a combination of better inventory management, new omnichannel capabilities, and the launch of a slew of private-label brands. Bed Bath & Beyond also plans to return $1 billion to shareholders through share buybacks over a three-year period, using the proceeds of its recent asset sales and other excess cash.
These initiatives hold real promise for the company. Most notably, Bed Bath & Beyond will launch a private-label brand carrying various home essentials at lower price points than it offers today. That could help the company win more sales from value-conscious shoppers.
Nevertheless, Bed Bath & Beyond could continue to lose market share to stronger rivals. For example, off-price giant TJX Companies' (TJX 0.68%) HomeGoods segment (which also includes its HomeSense chain in the U.S.) posted a 12% comp-sales gain and a 14% increase in total sales last quarter. Importantly, it did so with no e-commerce presence.
As the pandemic recedes and consumers become more comfortable shopping in person, HomeGoods' market-share gains could accelerate. TJX also plans to launch a HomeGoods e-commerce business later this year.
Adding to the threat, TJX plans to expand HomeGoods and HomeSense from 855 domestic locations as of late January to at least 1,500 stores over the long term. This suggests that TJX sees an incremental sales opportunity of $5 billion or more, some of which would come at Bed Bath & Beyond's expense.
An uncertain earnings trajectory
Even after falling 12% on Wednesday, Bed Bath & Beyond stock trades for more than 18 times the 2021 Wall Street analyst consensus for EPS of $1.33. That's no bargain for a retailer with razor-thin and volatile margins.
If management gets sales growing again while expanding gross margin as planned, Bed Bath & Beyond stock could certainly rise over the next few years. However, investors shouldn't underestimate its competitive disadvantages relative to mass merchants like Target, which benefit from much higher traffic and lower costs -- not to mention off-price retailers like TJX that can offer unbeatable prices.
While Bed Bath & Beyond is making smart moves to bolster sales and earnings, its new initiatives may not fully offset the long-term sales and margin pressure it faces from losing share to stronger competitors. Investors should probably wait until the company shows sustained progress toward its financial goals before considering investing in Bed Bath & Beyond.