Has Bed Bath & Beyond Become A Bargain?

| About: Bed Bath (BBBY)

Summary

While the earnings of BBBY have remained essentially flat since early last year, the stock has lost almost 50%.

The company is facing increasing competition from AMZN and other retailers as there is a secular shift away from "brick-and-mortar" retailers.

The company is executing an aggressive share repurchase program.

Bed Bath & Beyond (NASDAQ:BBBY) has lost almost 50% off its peak since early last year. This may seem quite surprising as the earnings of the company have remained essentially flat throughout this period. Therefore, it is only natural to wonder whether the plunge of the stock has presented a great bargain.

First of all, the recent report of the fiscal Q2 results was very similar to the previous earnings releases as it had the same ominous characteristics. The revenue remained essentially flat while the cost of sales increased 1% and the SG&A costs climbed 6%. Consequently, the earnings decreased 17%. Thanks to the pronounced share repurchases, which reduced the share count by 10%, the earnings per share decreased only 8%.

The above pattern of flat sales and escalating costs has been prominent in all the earnings reports of the last two years. The company has been facing increasing competition from Amazon (NASDAQ:AMZN) and other retailers, as there is a secular shift away from traditional "brick-and-mortar stores." So far the company has failed to tackle this secular trend. On the one hand, it has offered attractive coupons to its customers and has thus maintained its sales flat. On the other hand, these coupons reduce the operating margin of the company. Even worse, customers get used to these coupons and hence many of them are not likely to shop at a full price in the future. It is remarkable that both the operating margin and the net margin of Bed Bath & Beyond have decreased by about 80 basis points per year on average in the last four years.

Another ominous fact, which has passed under the radar, is the recent stance of the management, which appeared comfortable with its expectations for the annual EPS to remain flat in their recent range of $4.50-5.00. While this guidance may not seem worrisome on the surface, it actually is because guidance includes the aggressive share repurchases, which reduce the share count by about 10% per year. Therefore, the management essentially indicates that it expects the annual earnings to continue to decrease by 10-20% this year and is not dissatisfied with this performance. This certainly does not bode well for the stock as management seems to have accepted declining profits as the new norm from now on.

Fortunately for shareholders, the share repurchases are executed at relatively opportune stock prices, as the stock keeps trading at single-digit P/E ratios. Therefore, the share count decreases by about 10% per year without the need to add much debt to execute these buybacks. On the other hand, investors should realize that the company spends almost all earnings on buybacks in order to limit the decline in its EPS. It should be a red flag that the company does not spend more to support its business, which has been under attack in the last few years. All in all, management prefers to invest earnings on share repurchases instead of supporting its weakening business.

On the bright side, Bed Bath & Beyond recently acquired One Kings Lane, which will serve as a cornerstone for growing offerings in furniture and home decor, according to management. Even better, the acquisition was implemented at a remarkably low price, lower than $30 M or 3% of the peak value of the acquired company. Nevertheless, while this may indeed be a step in the right direction, it is probably too little to put a stop in the spiral of the declining earnings of the company.

To sum up, Bed Bath & Beyond is facing increasing competition from Amazon and other retailers and has been unable to respond successfully so far. Management has only managed to partly offset the declining earnings via aggressive share repurchases. However, as long as the earnings continue to decrease, the stock should not be viewed as a bargain. Only when the management succeeds in putting a stop on the downward spiral should investors reevaluate the stock. Unfortunately for shareholders, there are no signs of stabilization on the horizon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.