Shares of Bed Bath & Beyond (BBBY 4.61%) lost a quarter of their value after the home goods retailer reported fiscal second-quarter results that fell well short of expectations.
While sales were impacted by a rise in COVID-19 cases that led to consumers avoiding stores, the company is in the midst of an existential turnaround and can't afford to have its recovery delayed.
Although the retailer was punished by the market because of the setback, that just might represent a buying opportunity for investors. I wouldn't argue for going all-in on Bed Bath & Beyond, but there's a good case to be made that its stock is worth a look at these depressed levels.
Growth that stalled out
Sales tumbled 26% in the second quarter on a 1% drop in same-store sales. CEO and President Mark Tritton said the quarter had gotten off to a strong start, but "In August, the final and largest month of our second fiscal period, traffic slowed significantly and, therefore, sales did not materialize as we had anticipated."
The decline was particularly acute in Florida, Texas, and California, three states that are especially important to the home goods retailer because they represent a large chunk of its revenue.
It wasn't all bad, though, as a good part of the sales drop (some 15 percentage points) was the result of selling off various non-core businesses, such as Cost Plus World Market and Christmas Tree Shops.
Also, the Buy Buy Baby banner saw comps surge by high-teens percentages throughout the quarter, and the period marked Bed Bath & Beyond's fifth consecutive quarter of adjusted profitability.
Free cash flow was essentially neutral, as operating cash flow of $75 million was offset by $76 million in capital expenditures related to store remodels, supply chain enhancements, and investments in information technology systems. But the capital expenditures will soon diminish as stores are modernized and the company will begin producing cash profits once more.
Still focusing on its core
Bed Bath & Beyond once looked like it might eventually go the way of one-time rival Linen-n-Things, which spiraled down until eventually declaring bankruptcy. But the home goods retailer seems to have a good shot at turning its business around.
It got a fresh start with a new board and management team led by Tritton, and is sticking to its knitting. The retailer considers its namesake Bed Bath & Beyond stores, Buy Buy Baby, Harmon Face Values, and Decorist to be its core brands, and while it's difficult to get a firm understanding of how it's performing against 2019 figures since it shed non-core assets, other than what seems like a hiccup because of the sudden uptick in COVID-19 cases related to the delta variant, the business still looks to be on track.
Tritton maintains Bed Bath & Beyond's higher-margin store brands are making greater penetration into sales, above what the retailer expected. Moreover, its digital presence, long ignored, is growing well above 2019's rate "at nearly double the proportion of sales."
Obviously, it's clear the home goods chain is still feeble so early in the turnaround, but it projects a sense of getting stronger, and investors should focus on the potential.
Too cheap to pass up?
Bed Bath & Beyond stock is very cheap. While you could say it's so for a good reason, it also represents opportunity.
Shares go for less than eight times projected earnings, a tiny fraction of its sales, and around four times the free cash flow it produces. That marks a business that was beaten down because it looked like it was on its way out, but it now also discounts it ever finding its way back.
That seems short-sighted to me, and as I noted before, I wouldn't make Bed Bath & Beyond's stock a significant portion of my portfolio. But the home goods retailer is looking too cheap to ignore at these levels.