Housewares retailer Bed Bath & Beyond (NASDAQ:BBBY) has seen its shares drop by nearly 65 percent this year.
While the overall market has fallen and retailers have been hit particularly hard, Bed Bath & Beyond is experiencing a uniquely negative set of circumstances that have sent its share prices plummeting. Will Bed Bath & Beyond Stock Recover?
Why Has Bed Bath & Beyond Dropped?
Bed Bath & Beyond has been through a bizarre roller coaster ride in 2022. In August, shares of the company surged on news that activist investor Ryan Cohen had purchased options on the stock in March.
In short order, however, Cohen sold 5 million shares at an average price of $21.17. Following Cohen’s sale, investors accused the company, CFO Gustavo Arnal and Cohen of participating in a pump-and-dump scheme. Arnal sold over 42,000 shares on the same day as Cohen.
Shortly after the price surge and insider sales, Bed Bath & Beyond stock sank further on news that the company’s suppliers were not receiving timely payments for goods that had been shipped. As a result, some suppliers halted shipments to Bed Bath & Beyond.
These circumstances, paired with heavy losses and falling sales, essentially led to a perfect storm of both business and legal difficulties for the housewares chain.
The Numbers Don’t Look Good
In Q2, Bed Bath & Beyond reported $1.44 billion in overall revenue. This number missed analysts’ expectations of $1.47 billion. More importantly, the Q2 sales were down 28 percent from the previous year. Same-store sales declined 26 percent, demonstrating a considerable slowdown in sales performance.
The company’s losses, however, were far worse than revenues. Analysts expected Bed Bath & Beyond to lose $1.85 per share. Instead, the company reported an adjusted loss of $3.22 per share. In 2021, Q2 earnings were slightly positive at $0.04 per share.
Margins have also been a persistent challenge for Bed Bath & Beyond. The company’s net margin currently stands at -16.98 percent. Even before the pandemic set in, margins had slipped into negative territory. The last time Bed Bath & Beyond posted a positive net margin in excess of 10 percent was in 2012.
To its credit, Bed Bath & Beyond has developed a plan to manage costs and reduce its footprint. Under this plan, some 20 percent of the company’s corporate and logistics staff will be eliminated.
150 stores will also be closed, allowing Bed Bath & Beyond to focus on its best-performing locations. Overall, the plan is expected to save $250 million this fiscal year.
Will BBBY Crash 90%?
Even after losing more than half of its value YTD, analysts don’t believe that Bed Bath & Beyond has finished its slide. The target price for BBBY from 11 analyst forecasts is $3, down 41.9 percent from the current price of $5.17.
Tellingly, not a single analyst currently rates Bed Bath & Beyond as a buy. The highest current rating on the stock is a hold, while the consensus rating is a sell.
Because of its lack of positive earnings, Bed Bath & Beyond cannot be valued using the standard P/E ratio. There are, however, several troubling metrics that suggest the stock is still overvalued. Among these is the company’s return on equity, which stands at an extremely worrying -90.9 percent.
Bed Bath & Beyond also carries more than six times its equity in debt. While the company has recently brought in additional financing in an attempt to regain its footing, this high debt level makes the stock a risky proposition.
Investors can also no longer count on Bed Bath & Beyond’s dividends to improve their returns. The company paid quarterly dividends until Q1 2020, often delivering a respectable yield. Since Bed Bath & Beyond is clearly in no position to restart its distribution, shareholders should not expect the stock to produce income again anytime in the near future.
Will Bed Bath & Beyond Recover?
Bed Bath & Beyond has at least some chance to recover. The company’s creditors have proposed a debt-swap agreement that would extend its repayment time.
If this deal is finalized, Bed Bath & Beyond could gain vital breathing room to pare back its excessive debt load. If its recovery plan is executed well and costs are managed carefully, the company could one day return to profitability.
However, the uncertainties associated with this stock are still too significant and too numerous for investors to put their money into the company.
While a slimmed-down version of the company created by the turnaround plan could hold on, other major retailers have failed to survive under similar circumstances. Sears, for example, attempted to slim down its retail footprint in 2015. The company survived for a few years but ultimately filed for bankruptcy in 2018.
The potential for share dilution is also a serious concern. In order to raise funds, Bed Bath & Beyond has filed to sell an additional 12 million shares. This would place further downward pressure on existing shares and deepen the losses investors have already seen.
Finally, Bed Bath & Beyond could suffer further reductions in revenue and earnings as inflationary pressures and a slowing economy hit the retail sector. While these macroeconomic conditions won’t last forever, the company is in poor shape to ride out hard times.
It’s also worth noting that it could take multiple years for management’s recovery plan to bear fruit. Analysts expect the company to lose about $8.78 per share in FY2023. As such, a serious turnaround likely couldn’t begin until late in 2023 or beyond.
Taking all of this into account, Bed Bath & Beyond does not look attractive from either a growth or a value perspective.
New investors will likely do well to steer clear of this stock, and those who currently hold it may want to consider selling. Any potential recovery would likely take quite some time, and the company may continue to struggle. Ultimately, Bed Bath & Beyond is a rather risky stock that does not seem to be justified by the potential rewards.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.