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Bed Bath & Beyond Continues to Defy Expectation in Q3

By Rich Duprey – Jan 9, 2022 at 7:15AM

Key Points

  • Bed Bath & Beyond's rising stock price is being attributed to Reddit traders rallying around the meme stock.
  • Yet the disappointing earnings report was not wholly the fault of the retailer.
  • The home goods retailer's turnaround may just be delayed, not abandoned.

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The rise in the home goods retailer's stock is not completely unwarranted,despite the dour earnings report.

Reddit traders are getting all the credit for boosting Bed Bath & Beyond's (BBBY -26.23%) stock price 8% on Thursday after the home goods retailer posted fiscal 2021 third-quarter results that at any other time would have been seen as a poor report.

Sales fell and missed Wall Street's expectations, losses dramatically widened, and the retailer said it was expecting to break even at best for the full year and might even post a loss of as much as $0.10 per share. 

With the stock down 73% from the highs it hit a year ago during the meme stock trading frenzy, not even the promise of a $265 million stock buyback should have caused the stock to soar so much. And due to ongoing supply chain shortages and rising inflation, there's a good chance its business will deteriorate further.

Yet here were are, and the stock was off to the races again on Friday, rising another 4% out of the gate, suggesting the meme stock traders are still rallying the troops around Bed Bath & Beyond.

Empty store shelves.

Image source: Getty Images.

Wall Street looks askance at the retailer's chances

Wall Street remains largely unenamored with the home goods retailer, especially after the earnings report suffered a round of target price downgrades, though those targets tend to be all over the place, with the new ones ranging from $10 to $19 per share from their previous level of $14 to $28 per share.

The bear thesis remains that Bed Bath & Beyond has lost relevance with consumers, especially during the pandemic. People have resorted to online shopping to meet their needs rather than going to a store, even when they physically can. Although the retailer has invested heavily in its e-commerce presence in recent years, with the rise of competitors over the years, consumers have plenty of options on where they want to shop.

Certainly, the COVID-19 outbreak delayed Bed Bath & Beyond's turnaround plan -- not its implementation, but the benefits it was expected to accrue. Despite a reopened economy, the impact continues to ripple outward, affecting the global supply chain. 

Shortages of goods hurt the retailer's performance, in part because it was unable to restock depleted inventory. It's a common complaint heard by many retailers these days, but for a business trying to pick itself up by its bootstraps to keep from going under, it was an especially inopportune time for the problem to arise.

President and CEO Mark Tritton told analysts he estimated Bed Bath & Beyond lost out on at least $100 million worth of sales because of the snafus. Add in runaway plus widespread inflation, and Bed Bath & Beyond also saw its costs rise for the period.

People looking at multicolored pillows.

Image source: Getty Images.

Retail investors see the home goods shop as still having a chance

Yet being a meme stock means Bed Bath & Beyond doesn't have to trade on its fundamentals. Part of the allure of its shares last year was they were heavily shorted by hedge funds. And as part of the rallying cry to Reddit traders, piling into any stock with large short interest ratios was the change needed to spur a short squeeze.

Bed Bath & Beyond's stock remains heavily shorted today, with 22% of its shares outstanding sold short. With just 2.2 days to cover -- or the amount of time it would take based on current trading volumes for short sellers to cover their position and buy back the stock -- it doesn't seem like a squeeze is imminent. Anything over seven days is usually considered a lot, increasing the potential for a squeeze.

Even so, I don't think the chat room investors are necessarily wrong here. Bed Bath & Beyond is in a difficult position due to forces beyond its control but is still generating almost $2 billion in sales despite closing numerous stores (it now wants to close some 200 stores, mostly its namesake locations).

It's also still largely able to produce excess free cash flow, though Tritton admits cash profits might turn negative in the fourth quarter because the company tried to build up its inventory ahead of the holidays.

A turnaround delayed is not a death knell

While consumers do have many shopping options, Bed Bath & Beyond remains a leader in the home goods industry. It has also narrowed its focus again to just its core banners, including buybuyBaby, Harmon Face Values, and Decorist. The first two in particular remain strong and growing.

The turnaround thesis may take longer than originally expected with less than 10 times next year's earnings estimates and trading for a tiny fraction of its sales. But a small Bed Bath & Beyond investment may not be the wrong choice to make as a bet on this retailer making good on its promise to be a smaller, but profitable, business.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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