Bed, Bath & Beyond Stumbles Into A Buying Opportunity

The Preliminary Results Are Ugly

Bed, Bath & Beyond (BBBY) is a company in transition and finding change isn’t easy. After reporting disappointing results for the 3rd quarter in Januar the company decided taking a look at the 4th quarter-to-date might be a good idea. The numbers are ugly, I won’t sugar coat it, but the stumble is presenting a buying opportunity for us today. Like I said Bed, Bath & Beyond is a company in transition and those efforts will pay off later this year.

Weak Holiday Performance Sends Shares Down 26%

Bed, Bath & Beyond released unaudited preliminary 4th quarter results last night after the bell. The release includes data for the first two months of the quarter, including the Cyber-Monday Holiday week. Comp sales for the period fell -5.4%, 440 basis points more than forecast, and the numbers get worse when adjusted for comparability. Last year’s 4th quarter did not include Cyber Monday, excluding that, comps are down a whopping -13%.

"We are experiencing short-term pain in our efforts to stabilize the business, including the pressures of store traffic trends coupled with our own execution challenges.”

Traffic trends equate to a decline of store traffic, evidenced by a double-digit decrease in the number of tickets for the quarter. These trends were compounded by execution challenges that include inventory issues (key items out of stock), increased promotional activity and storewide markdowns.

The upshot is that promotional activity and markdowns helped drive a high-single-digit increase in the average ticket amount, enough to offset but not overcome the traffic issue. When the traffic issue, due in part to low inventory is fixed we can expect to see comps turn positive once again. Remember, you can't sell what you don't have, adjusting for inventory comp sales would have been much better.

Target’s Multi-Channel Guru Leads Turnaround Efforts

CEO Mark Tritton, formerly CMO of Target (TGT), took the helm at BBBY just this past October. His first move was to sell a large portion of the company’s real estate on a lease-back arrangement to free up capital. The deal, with private equity, generated $250 million in proceeds that have since been used to fund turnaround efforts, pay down debt, and fund share buybacks. Tritton is also considering the sale and divestiture of other non-core, non-essential assets with the intent to clean up the balance sheet and raise cash.

"As we take steps to position Bed Bath & Beyond to deliver long-term sustainable growth, we are fast-tracking our efforts to rebalance our portfolio, reset our cost structure, and enhance our leadership and talent."

It’s Not All Bad News, eCommerce Surged 20%

The purpose of the preliminary release was for management to “look for insights” into how to best focus their efforts. The goal is to modernize the business and better serve the customers who are turning more and more to eCommerce. With this in mind, it is no surprise that BBBY reported a 20% increase in eCommerce for the period. Considering Tritton’s multi-channel experience I expect to see the company focus more on this in the coming quarters.

“However, we did achieve a notable positive shift in sales in our digital channels during this period, with growth of approximately 20%."

The outlook for eCommerce is robust to say the least. Although the pace of growth is expected to slow, on an industry-wide basis, from 21% in 2019 to roughly 16% in 2023, the share of e-commerce as a portion of total retail sales will grow. This equates to an 85% increase in annual e-commerce sales by 2023 or just over $6.5 billion annually. That’s a lot of cabbage and independent businesses like Bed, Bath and Beyond are finding it easy to compete with the likes of Amazon (AMZN).

The Technical Outlook: A Bottom But Don't Buy Just Yet

Shares of BBBY fell more than 25% in the premarket action and opened at a four-month low. The bias is certainly to the downside but a bottom may in the process of forming.

The near-term outlook is bearish, today’s price action is making losers out of a lot of people and that usually leads to more selling. I am looking for the stock to continue moving lower and/or drifting sideways until confirming support later this spring. The fall to support may be coincident with the actual 4th quarter earnings release scheduled for April 15th. Until then, traders are advised to wait for support to confirm before entering bullish positions.

The first target for support is near the $11.00 level. This is the high-water mark in the month just before Tritton took over the company and an attractive target for those investing in Tritton’s ability. If price action can not hold that level a move down to the $10.00 level or lower is likely. The make-or-break target for support is at last year’s low near $7.50 although there are some possible support levels above that. This $7.50 is also a long-term low the stock hasn’t seen in twenty years so of particular importance to investors today.