Momentum or meme: Is the Bed Bath & Beyond stock worth it?

The Bed Bath & Beyond [BBBY] share price took a tumble last week after the company reported a weak set of second-quarter results. The drop confirmed some analysts’ views that Bed Bath & Beyond is a so-called “meme stock” that are hyped on social media.

However, it is in sharp contrast with the company’s chief executive Mark Tritton’s comment who told Yahoo Finance in June that the company was a “momentum stock, not a meme stock".

"What we see is regaining share in bed, bath and kitchen. We are rebounding stronger than a number of our competitors who were closed the same time [because of the pandemic]," he said at the time.

His statements followed the company’s first quarter results, which saw net sales of $1.95bn beating forecasts of $1.87bn. But there are indicators that even after the second quarter wipe out there may be more momentum than meme at Bed Bath & Beyond.

The Core Business

The home, baby, beauty and wellness retailer, which sells both online and from the 1,400-plus stores it has around the world, said sales had dropped 26% year-on-year to $1.99bn in its announcement on 30 September, short of analyst expectations of $2.06bn.

The company’s adjusted gross margin was short of its previous guidance at 34% at 30.03%, while its adjusted earnings per share fell 92% to $0.04. Analysts had forecasted $0.52. It blamed a re-emergence of Covid fears hitting shopper traffic, steeper cost inflation and unprecedented supply chain challenges.

It now expects third quarter adjusted earnings to be between breakeven and 5 cents per share, with sales ranging from $1.96bn to $2bn. Analysts had previously forecast earnings of $0.28 on sales of $2.02bn, according to Refinitiv data.

The Bed Bath & Beyond share price plunged from $22.20 at the close on 29 September — the day before the announcement — to $16.58 at the close on 1 October.

A serious stock?

In the year to 4 October, Bed, Bath & Beyond’s share price has dropped 11.6%. In comparison peers Williams-Sonoma [WSM] and Aaron’s Company [AAN] have had a better run so far this year. The former has risen from £101.81 when markets opened this year to $170.1 at the close on 4 October, up 67%, while the latter is up from $19.13 to $27.60 over the same period, up 44.3%. Sleep Number’s [SNBR] share price is up 13.4%.

Bed Bath & Beyond has a 1.2% weighting in the Invesco S&P SmallCap Consumer Discretionary ETF [PSCD] which is up 33.4% this year.

“After several encouraging steps forward, Bed Bath & Beyond took a big step back in Q2" - Zachary Fardem, Retail Analyst, Wells Fargo

Bed Bath & Beyond's fundamentals

“While our results this quarter were below expectations, we remain confident in our multi-year transformation,” Tritton said after the disappointing second quarter results. He said the company’s three-year plan to increase sales targets was making progress, with remodeled stores to remove cluttering, double digit growth at its Buybuy Baby website and its new higher margin owned brands, selling items such as bath towels and cooking utensils, outperforming. The company is forecasting full year sales of $8.1bn to $8.3bn, flat-to-slightly up comparable sales, and adjusted EPS in the range of $0.70 to $1.10.

Bed Bath & Beyond's online business is thriving, with demand for baby clothes and travel gear strong.

Its recent tie-up with DoorDash is also likely to hike digital sales. It will deliver on-demand delivery of goods from over 700 stores through the nationwide partnership. It is the first home retailer and baby goods seller on DoorDash’s app and website.

However, Chris Markoch, writing in Entrepreneur, reports that institutional ownership for the stock is 82%, which “leads me to believe that the ‘smart money’ is short selling”.

He did see some potential positivity in the stock: “What seems clear is that retail investors haven’t lost interest in the stock. Which could mean that it will have some pep in its step,” he added.

Wells Fargo retail analyst Zachary Fadem wasn’t buying the good news story, reported CNBC. He said second quarter figures "undeniably casts doubt” on its ability to deliver on the turnaround. “After several encouraging steps forward, Bed Bath & Beyond took a big step back in Q2,” Fadem said.

Could Bed Bath & Beyond bounce?

There is plenty of potential in the group’s addressable markets.

According to ResearchandMarkets.com, the global furniture and home furnishings stores market is expected to grow from $372.83bn in 2020 to $404.7bn in 2021, at a compound annual growth rate (CAGR) of 8.5%. The market is expected to reach $481.11bn by 2025.

The research firm also forecasts that the Global Baby Apparel Market size is expected to reach $207.1bn by 2026, rising at a 8.8% CAGR from 2020.

If Bed Bath & Beyond can deliver on its transformation strategy and keep growing its digital offerings, as with the DoorDash deal, it could still sleep comfortably in the months ahead.