Just as buying a stock simply because hedge funds are betting against it by shorting its shares is a foolish investment strategy, the opposite is true, too. Shorting a stock without looking at the fundamentals of the business means you're simply gambling, not investing.

Bed Bath & Beyond (NASDAQ:BBBY) just dealt hedge funds and other short-sellers a decisive blow when it reported fiscal first-quarter results that were significantly better than expected. Because the home goods retailer is one of those meme stocks that actually still has a future, the foolish bet was to think its business is still tanking. Bed Bath & Beyond just showed those betting against its business just how wrong they were.

Two people looking at pillows in a store.

Image source: Getty Images.

Fast and furious

Bed Bath & Beyond reported net sales of $1.95 billion for the first quarter of 2021, a 49% gain over last year and handily outstripping the $1.87 billion Wall Street was expecting. It's the fourth consecutive quarter the retailer enjoyed higher sales, indicating its vaunted turnaround strategy is on track.

While the home goods outlet did miss analyst forecasts on earnings, posting adjusted profits of $0.05 per share, $0.03 less than predicted, it now sees comparable-store sales for the rest of the year being stronger than thought. Management raised guidance for comps to low single-digit-percentage growth compared to its prior outlook for flat comps.

It also raised its full-year net sales guidance to a range of $8.2 billion to $8.4 billion from $8 billion to $8.2 billion. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are also now forecast to be higher, too, from $520 million to $540 million, up from $500 million to $525 million. For the first time since the pandemic, it offered adjusted profit guidance of $1.40 to $1.55 per share.

A banner quarter

There's a reason Bed Bath & Beyond did so well: It's sticking to what it knows best. The retailer has jettisoned all of its tacked-on businesses and is instead focusing on its best, core opportunities.

The retailer considers its namesake Bed Bath & Beyond stores, buybuy BABY, Harmon Face Values, and Decorist to be its core. Net sales at the quartet of chains were up 73% for the period, but the Bed Bath & Beyond banner was really the star, with revenue nearly doubling.

Obviously it is going up against very easy comparables from last year when its stores were largely closed for the quarter, but before the pandemic hit, it was still questionable as to whether consumers would respond to the turnaround strategy. The company had only just cleaned house in the c-suite and was just launching a drive to return its business to growth when the COVID-19 outbreak struck, putting its plans on hold.

The four consecutive quarters of growing sales seems to indicate it's working, and betting against the home goods giant was a poor decision.

Holding the bag

It seems a number of short-sellers did see the writing on the wall and closed out their positions recently. The number of shares sold short fell from a peak of 33.3 million shares as of May 28, more than were even sold short during the height of the meme stock frenzy in January, to 20.4 million shares in mid-June.

That equates to almost 20% of Bed Bath & Beyond's float being sold short, still a significant percentage, even if it is 38% below what it had been two weeks prior.

Yet short-sellers have not fared well against the retail investor army that seeks to defend such beaten-down stocks. While those defenders hold a number of misconceptions about exactly what they're doing, they've still trounced the shorts.

The short story

Bed Bath & Beyond's stock is up almost 7% over the past month and 68% higher year to date. Over the last 12 months, shares of the retailer have rallied to gains of 176%. That's likely part of the reason Bed Bath & Beyond's short interest has dropped as it has, though if some investors looked at the prospects for its continued success they might have gotten out even sooner.

The retail industry is still in a tough spot, and Bed Bath & Beyond is not out of the woods, either. Yet it's clearly on the road to recovery, and that will undoubtedly have investors cheering and the short-sellers licking their wounds.

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.