Does The Bed Bath and Beyond Stock Rally Still Have Legs?

Bed Bath and Beyond NYSE: BBBY, recently has seen a significant increase in its stock price, mainly owing to speculative sentiment. The stock has rallied from its recent lows of $4.38, to $23, only to fall back down to $9.53 per share. Despite, the recent rally, which can be attributed to speculation, is there any value in the stock?

The recent past has not been kind to Bed Bath and Beyond, and the pandemic only worsened the company's fortunes. Management recently announced that it will be cutting over 150 stores and up to 20% of its corporate and supply chain employees. In addition, many companies, have tended to raise cash when their stocks have rallied, and, Bed Bath and Beyond has also decided it will use the speculative environment to raise $500 million in cash in order to restructure the company. The news led to the stock diving by 21 percent, as investors scrambled to reassess, since the cash raise will lead to a 12 million dilution of shares.

Management is hoping the liquidity will help the company overcome the transition period, as it looks to stem the high levels of cash burn in recent times. Bed Bath and Beyond have been burning through significant levels of cash for a number of quarters, with cash flow in FY22 coming in at -$322 million, and the current cash flow to-this-this month (TTM) coming in at -$722 million. Regardless, the company isn't insolvent, and the current cash and cash ,equivalents for the company stand at $200 million. Post restructure, Bed Bath and Beyond is likely to see far more stable cash flow, and the CEO stated the following:

“While there is much work ahead, our road map is clear and we’re confident that the significant changes we’ve announced today will have a positive impact on our performance,” said Sue Gove, a board member who is serving as interim chief executive.”

What will be the impact of the current restructuring?

The current average cost per employee for Bed Bath and Beyond stands at $28-29,000, and the total employee count stands at around 55,000. A reduction in headcount will likely cut the total number of employees by up to 10-12,000, and the reduction is likely to reduce total costs by anywhere from $350-$400 million, which will then push the company towards positive flow, and profitability once again.

Meanwhile, for many years store count stood at around 1500, but with the pandemic that number fell to 1000, and now the company is set to further reduce store count by another 150, bringing total to around 800 stores, the lowest in decades. But the lower store count isn't all bad news and there are a number of factors driving this change. The biggest factor driving the move away from brick-and-mortar stores is an increasing preference for online shopping, and now that online sales are increasingly overtaking offline sales, the entire business model is also set to change. Online sales increased by over 70% in 2021, and management is aiming to move the majority of their operations online. . BBBY is likely to further cut brick and mortar stores, a trend that has become quite common across North America, as more and more stores shut down.

Looking forward to the future

Despite the speculative rallies, the current valuation for the company may, in fact, be inexpensive, and with cost-cutting becoming an increasing reality, should be heading towards profitability in the fourth quarter of FY23, or the first quarter of FY24. The current price-to-sales stands at 0.15, which is very low even for a traditional brick and mortar retail business. When combined with increasing online sales, margins are likely to increase as the company reduces its capital intensity. Although, same-store sales are expected to fall by 25% for the year, and revenue is expected to come in around $6-6.5 billion, if profitability were to head towards historical margins, which have stood at around 7-8%, the company would trade well below its intrinsic value.

It remains to be seen whether management can manage to achieve its goals, and get back on track, until then the stock price is likely to see fluctuations.