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Bear Of The Day: Bed Bath & Beyond (BBBY)

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Bed Bath & Beyond (BBBY - Free Report) has lost 80% of its value over the past 5 years, and I don’t see this toxic equity rallying back to highs anytime soon. BBBY began to bounce back from its $7.30 lows in August, but following a very disappointing earnings last week, these shares are again on a downward trajectory. Analysts have sizably dropped EPS expectations, and BBBY is now sitting at a Zacks Rank #5 (Strong Sell).

BBBY is another product of the retail apocalypse. Its inability to adapt to the changing commerce landscape has been its downfall. The company has been shaving down its profitability at an accelerating rate since 2014, and today Bed Bath & Beyond’s bottom line is just a fraction of what it was 6 or 7 years ago. It is expected to have declining revenues for the next 3 years. 

The once strong free-cash-flows are turning negative, and the company has had to raise more debt to keep its liquid capital balanced. Gross margins are deteriorating quickly due to promotions, price matching, and other incentives to get people in the door, but unfortunately, it has not been enough.

Bed Bath & Beyond was forced to close 40 locations in 2019 and 20 more closures that were delayed until fiscal 2020. This is not the same massive scale of closures that other retailers had seen. Gymboree, which was recently purchased by Children’s Place (PLCE - Free Report) , closed 800 locations in 2019, Chico’s (CHS - Free Report) is in the process of closing at least 250 stores, and GAP is beginning its closure of around 230 stores. I expect that Bed Bath & Beyond will continue to see an accelerating number of closure if significant systemic changes aren’t made.

Bed Bath & Beyond is trading at richer multiples than I think are warranted. Despite the company’s deteriorating financials, BBBY is still being valued on the high end of its 5-year trailing-twelve-month P/E valuation.

Take Away

This is one of those toxic retail assets that I would stay away from. There is definitely a further downside to this falling knife, and unless management can leverage a compelling omnichannel product offering that is consistent with the needs/wants of this new generation, I don’t see this firm staying afloat for much longer. Look for systemic changes in Bed Bath & Beyond’s strategy for clue into the company’s long-term trajectory.

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