Bed Bath & Beyond Continues to Defy Expectation in Q3

Reddit merchants get full credit for boosting Bed bath in addition‘S (NASDAQ: BBBY) Share price 8% on Thursday after the homeware retailer released third quarter 2021 results, which at any other time would have been considered a poor report.

Sales fell and fell short of Wall Street’s expectations, losses skyrocketed, and the retailer said it expected to break even for the full year at best, and could even post a loss of as much as $ 0.10 per share.

With the stock down 73% from its highs a year ago during the Meme stock trading frenzy, not even the promise of a $ 265 million share buyback should have propelled the stock that much. And with ongoing supply chain bottlenecks and rising inflation, there’s a good chance that business will continue to deteriorate.

But here they were, and the stock got back in the running on Friday, up another 4% to begin with, suggesting meme stock traders are still rallying the troops around Bed Bath & Beyond.

Empty shop shelves.

Image source: Getty Images.

Wall Street sees the retailer’s chances as wrong

Wall Street remains largely unpopular with the homeware retailer, especially after the earnings report suffered a round of target price downgrades, though those targets tend to be everywhere, with the new targets being between $ 10 and $ 19 per share from their previous level of 14 to $ 28 per share.

The bear thesis remains that Bed Bath & Beyond has lost its relevance with consumers, especially during the pandemic. People have resorted to online shopping to meet their needs instead of going to a store even when physically they can. Although the retailer has invested heavily in its ecommerce presence in recent years, with the rise of competitors over the years, consumers have many options where to shop.

Certainly, the COVID-19 outbreak has delayed Bed Bath & Beyond’s turnaround plan – not its implementation, but the expected benefits. Despite a reopened economy, the effects continue to have an outward impact and affect the global supply chain.

Shortages of goods affected the retailer’s performance, in part because of the inability to replenish depleted inventory. It’s a common complaint heard from many retailers these days, but for a company trying to stick to their bootstraps to avoid going under, this was a particularly inopportune time for the problem to arise.

President and CEO Mark Tritton told analysts that he estimated that Bed Bath & Beyond lost at least $ 100 million in sales as a result of the Snafus. Add to this the runaway and widespread inflation, and the cost of Bed Bath & Beyond also rose over the period.

People looking at colorful pillows.

Image source: Getty Images.

Private investors still see an opportunity in the household goods store

However, since it’s a meme stock, Bed Bath & Beyond doesn’t have to act on its fundamentals. Part of the appeal of its stocks last year was that they were heavily shorted by hedge funds. And as part of the outcry from Reddit traders, piling up stocks with large short-rate ratios was the change needed to instigate a short squeeze.

Bed Bath & Beyond shares remain strongly short today, with 22% of the outstanding shares sold short. With just 2.2 days to cover – or the time it would take short sellers to cover their position and buy back the stock based on current trading volume – it doesn’t seem like a shortage is imminent. Anything beyond seven days is usually viewed as a lot, which increases the potential for a bottleneck.

Even so, I don’t think chat room investors are necessarily wrong here. Bed Bath & Beyond is in a difficult position due to forces beyond its control but still has nearly $ 2 billion in sales despite numerous stores closing.

It’s also still largely able to generate excess free cash flow, though Tritton admits cash earnings could turn negative in the fourth quarter as the company tried to build up its inventory levels before the holidays.

A delayed turnaround is not a death knell

Although consumers have plenty of shopping options, Bed Bath & Beyond remains a leader in the homeware industry. It has also narrowed its focus back to its core banners, including buybuyBaby, Harmon Face Values, and Decorist. The first two in particular stay strong and grow.

The turnaround thesis could take longer than originally expected, as earnings estimates for the next year are less than ten times and it trades for a tiny fraction of sales. But a small investment in Bed Bath & Beyond might not be the wrong choice to bet on that this retailer will deliver on its promise of being a smaller but profitable business.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, happier, and richer.

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