Why Is Everyone Talking About Bed Bath & Beyond Stock?

Bed Bath & Beyond's (BBBY) stock price plunged 24% on June 29 after the retailer posted a dismal first-quarter earnings report. Its revenue plunged 25% year over year to $1.46 billion, which missed analysts' expectations by $50 million, as its comparable-store sales tumbled 23%.

Its net loss widened from $51 million to $358 million on a GAAP (generally accepted accounting principles) basis. On a non-GAAP basis, it posted a net loss of $225 million, compared to a net profit of $5 million a year earlier, and its net loss of $2.83 per share broadly missed analysts' estimates by $1.44.

Image source: Getty Images.

Bed Bath & Beyond's big earnings miss prompted its board of directors to dismiss CEO Mark Tritton, who had taken the helm in November 2019 to turn around the struggling big-box retailer. Investors initially embraced Tritton, who previously served as Target's (TGT 0.39%) chief merchandising officer, but turned against him when the company's growth rates failed to improve.

These developments have turned Bed Bath & Beyond into a hot topic again on Wall Street. Could this battered retailer rise from the ashes after shedding more than 80% of its market value over the past five years?

What happened to Bed Bath & Beyond?

Prior to Tritton's arrival, Bed Bath & Beyond had struggled to keep pace with Amazon (AMZN -1.52%), Walmart (WMT -0.08%), Target, and IKEA in the evolving retail market. Meanwhile, activist investors repeatedly accused the company's management of neglecting its cluttered stores, making poor acquisitions based on nepotism, and enriching family members and top executives with excessive compensation.

Those allegations eventually drove Bath & Beyond's board to oust CEO Steven Temares and hire Tritton, who had been instrumental in Target's turnaround, to fix its broken business. Unfortunately, Tritton barely had any time to implement his strategies before the pandemic started.

Bed Bath & Beyond's revenue fell 7% to $11.16 billion in fiscal 2019, which ended in February 2020, as its comparable-store sales declined 6.9%. Its net loss widened from $137 million to $613 million.

How did Tritton try to save Bed Bath & Beyond?

After taking the helm, Tritton fired most of the company's executives, divested most of its non-core banners (including Christmas Tree Shops, One Kings Lane, and Cost Plus World Market), and focused on strengthening its four core banners (Bed Bath & Beyond, BuyBuy BABY, Harmon Face Values, and Decorist). Tritton also closed hundreds of underperforming Bed Bath & Beyond stores, cleared out its inventories with steep discounts, and expanded its e-commerce ecosystem.

At first, those efforts seemed to bear fruit. Its reported sales still declined 17% to $9.23 billion in fiscal 2020 -- mainly due to a steep drop in the first quarter as it closed its stores during the onset of the pandemic -- but starting in the second quarter its comparable-store sales grew for four consecutive quarters.

Why did those efforts eventually collapse?

Unfortunately, that recovery abruptly stalled out, and Bed Bath & Beyond's comps started to decline again over the following four quarters. Its adjusted gross margins also tumbled below 30% over the past two quarters.

Data source: Bed Bath & Beyond.

It mainly blamed its slowing comps growth and tumbling margins on new COVID-19 variants, supply chain disruptions, and inflationary headwinds.

However, many other retailers faced the same challenges but generated stronger growth. For example, Target's comps still grew 12.7% in 2021 on top of its 19.3% growth in 2020. Walmart's U.S. comps rose 6.4% in fiscal 2022, which ended this January and grew 15% on a two-year stack. Amazon's North American sales increased 18% in 2021.

Therefore it certainly seems like competition from better-run retailers is still a major problem for Bed Bath & Beyond, and its aggressive markdowns -- which are crushing its gross margins -- aren't bringing shoppers back to its stores.

Its vague outlook justifies its discount valuation

Bed Bath & Beyond didn't provide any clear guidance for the rest of the year. But during the conference call, CFO Gustavo Arnal said its comps "continue to trend in the negative 20% range" in the second quarter.

On the bright side, Arnal expects its comps to start improving sequentially in the second half of fiscal 2022 as it clears out its excess inventories. He also expects the company to reduce its capex by a "minimum of $100 million from $400 million to $300 million" for the full year.

For the time being, independent board member Sue Gove will serve as the company's interim CEO. During the call, Gove said the company still had "a lot to do" and "must do it quickly," and would prioritize streamlining its business with a "back-to-basics mantra" to drive more traffic to its stores.

However, analysts still expect Bed Bath & Beyond's revenue to decline 9% this year as it more than doubles its net loss per share. The stock might look dirt cheap at less than one time this year's sales, but investors should avoid this battered stock until a few green shoots actually appear.