Bed Bath & Beyond continues to defy expectations in Q3

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Reddit traders get all the credit for boosting Bed bath and beyond‘s (NASDAQ: BBBY) 8% share price on Thursday after the home goods retailer released third quarter FY2021 results that would have been at any other time seen as a bad report.

Sales fell and exceeded Wall Street expectations, losses widened significantly and the retailer said it expects at best to break even for the entire year and may even post a loss of up to reach $ 0.10 per share.

With the stock down 73% from its highs a year ago during the frenzy of stock trading, even the promise of a $ 265 million stock buyback shouldn’t have pushed up. action at this point. And with continued supply chain shortages and rising inflation, there’s a good chance its business will deteriorate further.

Still, stocks rallied on Friday, rising another 4% against the gate, suggesting that even stock traders are still rallying the troops around Bed Bath & Beyond.

Image source: Getty Images.

Wall Street looks askance at retailer’s chances

Wall Street remains largely insensitive to the home goods retailer, especially after the earnings report suffered a series of target price cuts, although those targets tend to be everywhere, with new ones ranging from $ 10 to $ 19 per share from their previous level of $ 14 at $ 28 per share.

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

Certainly, the COVID-19 epidemic has delayed Bed Bath & Beyond’s recovery plan – not its implementation, but the advantages it should derive from it. Despite a reopened economy, the impact continues to spread outward, affecting the global supply chain.

Merchandise shortages hurt the retailer’s performance, in part because it was unable to replenish depleted inventory. It’s a common complaint heard by many retailers these days, but for a business trying to get up by its bootstraps to avoid sinking, this was a particularly inopportune time for the problem to arise.

President and CEO Mark Tritton told analysts he estimates Bed Bath & Beyond has lost at least $ 100 million in sales because of the problem. Add to that the runaway and widespread inflation, and Bed Bath & Beyond also saw its costs increase over the period.

People are looking at multicolored pillows.

Image source: Getty Images.

Retail investors see home goods store still having a chance

Again be a stock of memes means Bed Bath & Beyond doesn’t have to trade on its fundamentals. Part of the appeal of its stocks last year was that they were sold heavily short by hedge funds. And as part of the rallying cry to traders on Reddit, stacking in any stock with significant short interest ratios was the change needed to spur a short press.

Shares of Bed Bath & Beyond remain heavily short today, with 22% of its outstanding shares sold short. With only 2.2 days to cover – or the time it would take based on current trading volumes for sellers to short cover their position and buy back the shares – it doesn’t look like a squeeze is imminent. Anything over seven days is generally considered a lot, which increases the potential for squeezing.

Even so, I don’t think chat room investors necessarily get it wrong here. Bed Bath & Beyond is in a difficult position due to forces beyond its control, but still generates nearly $ 2 billion in sales despite the closure of many stores (it now wants to close some 200 stores, mostly its namesake stores).

It’s also still largely capable of producing excess free cash flow, although Tritton admits cash earnings could turn negative in the fourth quarter because the company tried to build up its inventory before the holidays.

A delayed turnaround is not a death knell

While consumers have many purchasing options, Bed Bath & Beyond remains a leader in the housewares industry. It also focused again on its main banners including buybuyBaby, Harmon Face Values ​​and Decorist. The first two in particular remain strong and growing.

The turnaround thesis may take longer than initially expected with less than 10 times next year’s earnings estimates and trading for a tiny fraction of its sales. But a small investment in Bed Bath & Beyond might not be the wrong choice to bet that this retailer delivers on its promise to be a smaller, but profitable business.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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