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With Sharks Circling Bed Bath & Beyond, It's Time Investors Checked Out

Bed Bath & Beyond (NASDAQ: BBBY) has been dropping in value as a retailer for years now, and the stock has shed an astonishing 90% of its value since the beginning of 2015. Earnings for the first quarter of 2019 did little to change a negative outlook.

The home goods chain is struggling to hold its own against a myriad of younger and more nimble retailers, and secular changes in the way consumers shop aren't helping. A short-term rebound could be in order after another drubbing, but investors who have been hanging on to hope of a full-scale turnaround should start looking for an exit.

The ugly numbers

Numerous things went wrong for Bed Bath & Beyond and its hodgepodge of subsidiary stores (like Cost Plus World Market and Buy Buy Baby) during its fiscal 2019 first quarter. Sales fell 6.6%, driven by a high single-digit decline for in-store traffic that was only slightly offset by struggling online sales efforts.

In spite of the company's stated goal to boost the bottom line by eliminating products with low profit margins, gross profits fell on merchandise sold. All the while, operating expenses ticked up slightly, and Beyond+ memberships -- the company's answer to Amazon.com's Prime -- has lost serious momentum, with only 1.2 million subscribers at quarter's end.

Metric

Three Months Ended June 1, 2019

Three Months Ended June 2, 2018

YOY Increase (Decrease)

Revenue

$2.57 billion

$2.75 billion

(7%)

Gross profit margin

34.5%

35%

(0.5 pp)

Operating expenses

$893 million

$884 million

1%

Goodwill impairment and other charges

$401 million

N/A

N/A

Earnings (loss) per share

($2.91)

$0.32

N/A

Adjusted EPS

$0.12

$0.38

(68%)

YOY = year over year; pp = percentage point. Data source: Bed Bath & Beyond.

Add in a $401 million impairment charge (basically for realizing losses on assets and investments that were purchased for too much money) and other severance costs, and the company reported a loss of $2.91 per share where there were earnings the year prior. Even when excluding the impairment and severance costs from this year's first quarter and last, the retail chain made a huge slide backward and is hurtling toward unadjusted bottom-line red.

To that end, management has said that stopping the decline in merchandise sales is the top priority. Updating the store format is part of the plan, but details remain vague. The plan is likely to stay nebulous, too, as the company still hasn't settled on permanent top leadership. Board member Mary Winston is still listed as the interim CEO and has been since May. In short, the company's current strategy lacks vision.

Image source: Getty Images.

We've seen this play out before

Bed Bath & Beyond's woes are another indicator that the retail apocalypse on brick-and-mortar stores brought on by the digital age is still going strong. Many chains that were slow to adapt are still struggling, and the gap between those succeeding and those that aren't is getting wider.

It isn't impossible to make the transition. Walmart and Target have succeeded in their strategy by upping their online sales know-how, doubling down on private-label brands and specialty online-only subsidiaries, and making order fulfillment more convenient for customers. But the big-box stores have also won because of the sheer breadth of what shoppers can get from them. More-niche retailers (including department stores) have not done so well trying to imitate this strategy in the new digital age. Bloated operations with far too much real estate haven't held up against online-only merchandisers.

In fact, according to the Census Bureau's latest Advance Monthly Retail report, home furnishing stores are down 0.8% year over year through June, and department stores are down 4.3%. Bed Bath & Beyond is below average in both categories with its first-quarter numbers. As for other specialty store segments, electronics and appliance stores have declined 4.6%, and sporting goods, book, and hobby stores are down an average of 6.7%.

The physical specialty store seems to be going the way of the dinosaur, with the digital-only specialty store taking its place. There will be a need for brick-and-mortar retailers -- at least for the foreseeable future -- but diversified retailers can easily fill that need and supplement with a digital presence. That leaves Bed Bath & Beyond on the wrong side of secular change.

There is some upside. After the most recent beating the stock took, shares trade at a paltry 2.4 times trailing one-year free cash flow (money left over after basic and capital expenses are paid for); the dividend, though it is at risk given the lackluster outlook, is yielding 6.2% a year; and Bed Bath & Beyond continues to throw good money after bad by repurchasing shares (it spent another $81.5 million during the first quarter alone). Those factors could mean a short-term rebound is in order for the stock.

Any such rally should be used as an exit point for shareholders, though. There currently isn't enough here to think Bed Bath & Beyond will be on a path to recovery anytime soon.

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