Is The Bed Bath & Beyond Rally Sustainable?

This massive move was triggered by news that the New Jersey-based retailer is on a path to tackling the declining trend in its sales. Developments that helped boost the stock include the launch of a digital marketplace that will sell goods from third-parties, in addition to a partnership with grocery chain Kroger (NYSE:KR) which will begin offering some BBBY products beginning next year. 

Bed Bath & Beyond also said its stock buyback program was proceeding ahead of schedule. The company said it expects to complete its $1-billion share repurchase plan by February, which is the end of its fiscal year. This is a full two years ahead of what the company had previously anticipated. There are still $400 million worth of buybacks remaining.

On Tuesday, Bed Bath & Beyond's CEO Mark Tritton said in a statement:

"We continue to execute our bold transformation and implement successful strategies that will fortify our near-term and long-term value creation. Today's announcement further underscores our ongoing confidence in our turnaround, and our ability to simultaneously generate positive cash flow, maintain a strong balance sheet and invest in our long-term growth, all while returning significant capital to shareholders."

In addition to its online marketplace, the home-goods retailer said it would start selling baby and home merchandise at Kroger and pilot a small-scale physical store in some Kroger markets starting next year. BBBY also named Anu Gupta as chief growth officer and Rafeh Masood as chief customer officer, both new roles. 

These steps are certainly positive, showing that management is trying to put its house in order. But investors should also remember that fundamentals matter more than hype. On that front, the retailer has a long way to go. 

Sales in the quarter that ended Aug. 28 fell 26% from a year earlier as store traffic slowed significantly in August amid renewed COVID concerns and supply-chain challenges. Revenue for the previous year declined 17.3% when the company posted a $150.8-million net loss.

Get The App

Join the millions of people who stay on top of global financial markets with Investing.com.

Download Now

The continuing challenge for Bed Bath & Beyond is whether it can attract customers at a healthier pace going forward when the e-commerce onslaught is forcing many brick-and-mortar retailers out of business. It had already been underperforming rivals at a time when homeowners are keen to buy home goods amid the booming housing market.

This poor track record is the major reason Wall Street analysts don’t favor BBBY stock for serious investors. Loop Capital Markets analyst Anthony Chukumba downgraded BBBY to sell from hold, saying in a note to clients that the partnership with Kroger was not a game changer.

Chukumba's note, cited by CNBC.com, said:

“None of these developments materially alter our view that BBBY has lost market share, mind share and consumer relevance — which we believe is further confirmed by the continuation of the company’s weak early F3Q 2021 sales trends last month. In addition, we question how many consumers are going to purchase toasters, flatware or Roombas from a supermarket’s website or stores.”

Loop has a price target of $14 per share, 28% lower than where the stock closed yesterday.

Morgan Stanley’s Simeon Gutman, who has a price target of $12 per share, reiterated his underweight rating, saying the company’s fundamental results could continue to weaken in the months ahead.

Said Gutman in a note:

“Sheer breadth of announcements – despite relatively benign implications – seemingly a big catalyst for a highly shorted stock with low expectations. ... Extreme stock volatility may be back, but our [underweight] thesis on category reversion holds.”

Bottom Line

We don’t recommend buying BBBY stock during the current meme-crowd fueled market hype. Long-term investors should focus on fundamentals, which, in our view, have not yet shown a sustainable turnaround.

Written By: Investing.com