Bed Bath & Beyond: No Squeeze Is Coming, So Why Hold It?
Summary
- BBBY remains elevated after a short squeeze saw shares rocket higher.
- To my eye, the stock is fully valued on 2024 earnings.
- With a full valuation and a much reduced short percentage, BBBY is uninteresting.
Home goods retailers have been all the rage since the worst of the pandemic ended right at a year ago. We can see below that one of the OGs - Bed Bath & Beyond (BBBY) - saw its shares hit $3 before rocketing to $54 earlier this year.
Of course the high that was printed was during the short squeeze mania that took hold of the market for a couple of weeks, with heavily shorted names like BBBY seeing massive buying interest from retail investors. I'd argue the $54 print from BBBY was a fairy tale driven by a short squeeze - evidence of which you can see in the volume numbers associated with the spike - but shares have emerged from the post-squeeze plunge in fairly good shape near $29.
Source: StockCharts
However, I see this as a very full valuation for BBBY given it is well into its multi-year transformation effort, yet the numbers just aren't being produced. BBBY was well-positioned to benefit from pandemic-altered shopping trends with its fairly recent digital push, and progress is undoubtedly being made. However, I'm not sure it is enough to justify a higher price, so while I'm not bearish, I'm certainly not bullish on the stock's prospects.
And for those waiting for short squeeze round two, the bad news is that the squeeze has already been squeezed; there is no round two coming.
A better business, but is it good enough?
BBBY has taken its fair share of lumps from investors in recent years because it was very late to react to obvious shifts in behavior from shoppers. BBBY had essentially the same board of directors for, I don't know, 8,000 years or something and they obviously weren't interested in competing digitally. That board is gone and BBBY has done a huge amount of hiring in the executive ranks, and to their credit, they've put BBBY back on the map for home goods.
Source: Investor presentation
BBBY is due to report FQ4 earnings in a couple of weeks and I expect the numbers we see will be quite positive; the most recent report snapshot is above. Digital comp sales nearly doubled for the Bed Bath & Beyond brand and were up 77% company-wide. The company has also undertaken initiatives to improve margins, and it has been closing unprofitable stores and making divestitures to reduce debt.
BBBY is also launching new private label brands that should help drive exclusivity - which should theoretically generate traffic - and boost margins, as private label brands virtually always offer better margins than products that are bought in.
That's all great, and BBBY deserves a lot of credit for turning around a business that was dying. The problem as I see it, however, is that all of that goodness is already priced in at $29.
Let's first take a look at revenue projections, which are pretty ugly.
Source: Seeking Alpha
This is not only a constantly negative slope, but the magnitude is massive. Estimates for all of the years in this chart have gone down, down, and then down some more in recent years. Even in the past few months - after the full extent of the pandemic was public knowledge - revenue estimates continue to fall.
BBBY has done some of this to itself with divestitures, but that doesn't explain anything close to everything we're seeing here.
Source: Investor presentation
Indeed, BBBY says it will see $3 billion of revenue losses after it divested five brands that weren't cutting it, as well as closing 200 underperforming stores unrelated to divestitures. But as we'll see below, that is certainly not BBBY's only top-line issue.
Source: TIKR.com
Comparable sales have declined very steadily for a decade or more, with the culmination of hideous numbers coming in fiscal 2020, which ended right as the pandemic struck, and was -6.8%. Keep in mind BBBY's fiscal 2020 results were unimpacted by COVID-19; that -6.8% was just how bad things were at the time.
The fiscal year that just ended is expected to see a -7.8% showing, but that is understandable. Next year, analysts expect to see a rebound of 8.8%, which essentially just retraces projected losses for fiscal 2021. In other words, once BBBY has lapped its divestitures/closures, revenue may stop falling, but what is going to drive it higher?
I cannot answer that question, which is part of the reason why I'm puzzled the stock is going for $29. Make no mistake that the new management team has done a masterful job of righting the ship, and I believe has saved BBBY from the scrap heap of history in doing so. But is that good enough for the current share price? I'm not sure it is.
Another reason why I'm cautious is that BBBY's margins have been declining from since before I started covering the stock years ago. Below we have trailing-twelve-month operating margins to illustrate this point.
Source: TIKR.com
I chose operating margins to illustrate this point but you can choose whatever version of profitability strikes your fancy; it will look something like this. I cannot recall a business that suffered margin erosion on a scale like this for this sort of time frame; this…is…ugly. BBBY saw years of pricing power fall away, endless promotions to try and get people in store, and high markdowns because of poor inventory purchasing. There is very obviously a bounce going on today as trailing-twelve-month operating margins are nearly back to zero (!), but there is a very long way to go.
BBBY has been intentionally battling some of the ailments I just mentioned and it is working.
Source: Investor presentation
The lack of promotions and coupons apparently added 180bps by itself to Q3 results, which is extraordinary. The company's digital push offset that with a 200bps margin decline due to the customer shipping and fulfillment costs, but BBBY is focused on all the right areas.
But as I see it, the market is already pricing in these changes and more, which means BBBY would have to massively surprise to the upside to continue to rally meaningfully from here.
Fully priced
The interesting thing is that BBBY isn't even all that close to breaking even this year, and yet the stock soars.
Source: Seeking Alpha
Shares trade at 23 times 2022 earnings, which is pretty steep given the history we've just seen, and the fact that BBBY is still a big box retailer that is trying to adapt to a digital-enabled retail landscape. The other problem is that even if we look all the way out to the 9.5X earnings shares trade for today on 2024 earnings, it looks fully valued.
Source: TIKR.com
This chart of price to normalized forward earnings from the four-year period ended January 2020 shows that BBBY spent years - literally years - under 10X forward earnings. I agree the company is in much better shape strategically and fundamentally, but it is also a lot smaller following 500+ stores being closes (divestitures + closures). Is it suddenly going to trade with a mid-teens multiple? I don't see any catalyst for that given BBBY appears to just be undoing the damage it previously inflicted upon itself. That's not to say it cannot trade at a mid-teens multiple someday, but keep in mind it is still losing money.
No short squeeze is coming
Apart from that, BBBY has been focusing on reducing debt, which it certainly needed to do.
Source: Investor presentation
I won't read the slide to you but the headline is that outright debt is down ~$500 million, as is lease liabilities, and while BBBY still has more than a billion dollars in senior notes, in addition to its nearly $2 billion in operating leases, it is nowhere near as leveraged as it used to be. That's a good thing, but only to the extent that it means the company isn't facing a liquidity crisis anytime soon despite its 2020 losses.
Finally, those investors that are looking for a short squeeze round two are going to be sorely disappointed. The epic saga of GameStop (GME) has caught the attention of people around the world - not just the investing community - and that has led others to try and push stocks like BBBY higher in the hopes of striking figurative gold. However, there is nowhere near enough shorting going on here to force that kind of thing.
Source: YCharts
Short interest is actually the lowest it has been for at least two years right now, as the spike in the share price caused a lot of covering that hasn't been reopened, at least not in the form of shorting shares (options are another way to short). In fact, BBBY had 40%+ of its float shorted continuously for nearly two years before the spike, and during much of that time, the stock was a dog.
In other words, there is no squeeze coming, so if you're holding BBBY at $29 in the hopes that you can diamond hand your way to the moon, you're barking up the wrong tree.
Likewise, if you're holding BBBY at $29 hoping for earnings to catch up to the share price, I think you'll be waiting a long time. The stock looks fairly valued on earnings that are at least three years away at this point, and I'm not interested in waiting and hoping for three years. BBBY is turning itself around and that's great, but it is fully priced in already.
This article was written by
Analyst’s 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (5)
