Bed Bath & Beyond: Still Too Risky of an Investment

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Volatility has been plaguing Bed Bath & Beyond (NASDAQ: BBBY) shares lately as investors’ opinions swing on the prospects of a rebound for the struggling retailer. Bears have plenty of bad news to point to that suggests accelerating market-share losses to come. Yet the chain has plenty of cash, a strong brand, and enough flexibility in its store footprint to potentially emerge from its turnaround strategy on a path to sustainable profits.

Unfortunately, Bed Bath & Beyond didn’t settle any of those major questions about its business in its recent second-quarter earnings report.

Let’s jump right in.

The interior of a multilevel shopping mall

Image source: Getty Images.

The growth news isn’t good

Coming into the report, investors were hoping to see signs of a growth rebound as Bed Bath & Beyond enters the peak holiday shopping season. The news on this score was bad, but not terrible. Sales at existing locations dove 7%, which implies falling market share and weaker customer traffic for a second straight quarter. The results also put the retailer on pace for major revenue declines this year after comps fell by about 1% in each of the last three fiscal years.

Still, the comps figure wasn’t any worse than in the fiscal first quarter, which means Bed Bath & Beyond could be stabilizing the business. Interim CEO Mary Winston, who is set to be replaced in the coming weeks once Bed Bath & Beyond announces its permanent CEO hire, said the chain is “making good progress” toward the goal of stabilizing sales and returning to growth, but it will be some time before investors can be sure a rebound has taken hold.

Profits hit by a wave

The consumer discretionary specialist booked a net loss of $139 million to mark a dramatic swing compared to the $49 million in profit it earned a year earlier. As has been the case for over a year, gross profit margin held steady as a slower pace of price cuts offset the negative impact of falling customer traffic.

Bed Bath & Beyond raised its inventory improvement program up to a new level, though, by purging the books of almost $200 million worth of low-margin or otherwise unsellable products. This move pushed reported gross profit margin down to 26.7% of sales compared to 33.7% a year ago. After adjusting for the writedown, that profitability metric inched up to 33.9% of sales from 33.7%. Executives implied that more aggressive writedowns were on the way, calling the latest move part of “the first wave of transformation initiatives” that also include payroll cuts and store closures.

Looking ahead

The good news is that by slashing inventory ahead of the holiday shopping season, Bed Bath & Beyond has lowered the financial risk around ending that period with bloated stores. The chain still has plenty of financial flexibility, too, with over $1 billion of cash on the books compared to $1.1 billion a year ago.

These positive factors have management expressing confidence that sales trends aren’t likely to collapse and that stability could be on the way as soon as the second half of fiscal 2019. That period includes the holidays, which will surely involve rivals targeting its market share, though. Given that elevated risk, and the big questions about the direction in which Bed Bath & Beyond’s permanent management team will take the retailer, investors are better off watching this retailing story from the sidelines.

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Demitrios Kalogeropoulos 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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