Bed Bath & Beyond Earnings Preview: Nearing A Do-Or-Die Moment

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About: Bed Bath & Beyond Inc. (BBBY)
by: Brian Gilmartin, CFA
Summary

Stock performance tied to what new Board and CEO can salvage.

Forward consensus EPS estimates starting to be revised higher - that is a positive.

Remarkably, the retailer is still free cash flow positive.

Bed Bath & Beyond's free cash flow yield is 37%.

When Bed Bath & Beyond (BBBY) reports their fiscal Q1 '20 financial results after the bell on Wednesday, July 10th, what investors are left in the stock will no doubt want to hear what the new "Bed Bath & Beyond" will look like and if there is any value at all left to unlock in the stock.

What's surprised me over the last few years is that as the stock has fallen from the $75 area in late 2014, early 2015 to the $11 area this week, is that free cash flow has remained positive and Bed Bath & Beyond continues to increase the dividend. (BBBY's dividend yield is now 6.1%, not all that different than AT&T's (NYSE:T).)

Here is a quick summary of the operational pain Bed Bath & Beyond endured:

  • Comps have been negative for 11 of the last 12 quarters averaging -1.1% for that period.
  • Gross margin has declined for 29 straight quarters from 42% roughly to last quarter's 34% averaging a 100 bp deterioration per year.
  • Operating margin has fallen 27 straight quarters from roughly 14% to last quarter's 6%, averaging a decay of 192 bp per year.
  • Including last quarter's 6% y/y decline, SG&A (sales, general and administrative expenses) rose 26 consecutive quarters, averaging 7% y/y gains, despite revenue growth averaging 4% gains for the same measurement period. (Have to love a management team that allows SG&A to rise faster than revenue for 7 years in the face of falling comps, deteriorating margins and gradually declining revenue growth.)
  • Pertinent to comps, the "couponing strategy" is still losing share to Amazon (NASDAQ:AMZN), according to sell-side analysts. Perhaps the new CEO and Board have a way to remedy this.

Some positives around BBBY:

  • Free cash flow has remained positive and the dividend - about 15% of free cash flow in dollars - looks to be pretty safe (for now).
  • Inventory-to-sales growth has continued to be managed well which has helped working capital remain healthy at $1.7-$1.8 bl over the last 3 years.
  • Capex and store count is gradually starting to come down although I think it's a little late.

Looking at forward EPS and revenue estimates and revisions:

5/19 (estimate) 2/19 11/18 8/18
2022 EPS est $2.40 $2.25 $2.14 n/a
2021 EPS est $2.21 $2.21 $1.72 $1.58
2020 EPS est $1.98 $1.96 $1.77 $1.64
2022 est EPS gro rt 9% 2% 24%
2021 est EPS gro rt 12% 13% -3% -4%
2020 est EPS gro rt -4% -5% -11% -19%
2022 PE 5x 5x 8x
2021 PE 5x 5x 10x 10x
2020 PE 6x 6x 10x 10x
2022 rev est ($'s bl's) $11.37 $11.46 $12.0
2021 rev est $11.3 $11.36 $11.63 $12.47
2020 rev est $11.5 $11.49 $11.75 $12.22
2022 est rev gro rt 1% 1% 4%
2021 est rev gro rt -2% -1% -1% 2%
2020 est rev gro rt -4% -4% -2% 0%

Source: 5/19 estimates courtesy of IBES by Refinitiv as of 7/10/19

The good news is there is the first sign of positive revisions in EPS estimates for fiscal 2020 and 2021, which means sell-side analysts are starting to (possibly) build some improvements and changes into Bed Bath & Beyond's fundamentals with the new CEO and Board.

The less good news is that forward revenue estimates are still declining albeit at lower rates of decline.

Bed Bath & Beyond's valuation:

Bed Bath historical valuation data Source: internal financial modeling and valuation spreadsheet

Here are some other valuation metrics:

5/19 est 2/19
3-yr avg exp EPS gro rt 5% 3%
3-yr avg exp rev gro rt -5% -2%
3-yr avg PE 5x 6x
Div yield 5.7% 3.5%
Div as % of free cash 15% 13%
Free-cash-flow yield 37% 24%
capex as % of cash flow 35% 35%
capex as % of rev 3% 3%
Price-to-sales 0.20x
Mstar moat none none

Source: spreadsheet and Morningstar data

Summary/conclusion: With fiscal Q1 '20 being reported tonight, the Street is looking for consensus revenue and EPS estimates of $2.58 billion and $0.08 for year-over-year declines of 22% and 93% respectively.

The one unambiguous positive is that forward EPS estimates are starting to be revised higher in the $2 range, which could mean that - at 10x forward earnings - Bed Bath & Beyond could trade to $20 on any signs of operational improvement.

The negatives are well known and what the new CEO and Board will do is also unknown to the retail investor.

Astute Seeking Alpha readers have noted in previous Bed Bath & Beyond articles that the company's disclosure in the Qs and regulatory filings are not detailing what is happening within the emerging retail growth areas at BBBY, so better disclosure and the ability for the Street to value some of the company's smaller, emerging strategies could help the stock.

Readers should use the 52-week low of $10.46 for the loss limit on the stock, thus a heavier volume trade below this level should be sold.

The fact that free cash flow remains positive, and the dividend appears safe, means not all is lost for the retail giant.

The easiest tactic for the new CEO to boost financial returns is to reduce headcount and close stores, but there are real people attached to these jobs but it may be the quickest way to stem the bleeding at Bed Bath & Beyond. It may also buy the retailer time to engineer a potential turnaround.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BBBY over 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.

Additional disclosure: BBBY reports after the bell July 10th