Investment Thesis

Bed Bath & Beyond (BBBY) announced that June comparables were positive and that it was cash-flow positive that month.

Bed Bath trades for less than 6x my conservative $300 million free cash flow estimate for 2021.

Assuming its digital efforts continue to pick up momentum, there could be too much negativity already pricing into the stock. This stock is well worth considering.

(Source)

Why Bed Bath? Why Now?

I’ve been long before Bed Bath and I had exited the position, with very little gains for what was a very long-term holding period. Hence, for all intents and purposes, it was a detraction from my portfolio.

So why return to the stock now? It’s clearly already surged massively in the past six months.

ChartData by YCharts

Admittedly, I missed out on chalking up those gains. But I can’t invest in hindsight. All I have in front of me is what lies ahead.

As we are about to go into Q2 2020 earnings, I decided to revisit Bed Bath and what I found was sufficiently attractive for me to build a position here.

Source: author’s calculations

Above we can see the trend in Bed Bath’s revenues going back to pre-COVID times. If you have followed the stock for a while you will be very familiar with the old management and their failures.

Then, just as the new management was starting to take the reins of Bed Bath, COVID happened and that forced numerous store closures and social distancing, which lead to approximately negative 50% y/y revenue growth rates.

However, during its Q1 2020 earnings call, Bed Bath’s CEO Mark Tritton spoke very positively about the company’s Buy-Online-Pick-Up-In-Store (”BOPIS”) and Curbside Pickup efforts:

Source: Q1 2020 Results

For the month of June, Bed Bath had stabilized its operations so that net sales were down only down 7% for that month. This is an impressive turn around if you think about it: going from a negative 49% in revenues in Q1 to negative 7% in June.

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What’s more, management was able to note that in June comparable sales were positive. Yes, this number has some adjustments.

  • Physical stores had 22% fewer store open days
  • Digital sales were strong and offset the decline in physical stores.

But given that Bed Bath’s market cap is still substantially less than $2 billion, I believe investors are not looking for a high growth story here, they are just trying to figure out whether Bed Bath can survive into the decade ahead.

Asset Divestitures Could Bring In Much Needed Cash

1-800-FLOWERS.COM has been made to complete on its previously agreed purchase of PersonalizationMall.com. This purchase will bring in $245 million in cash.

Given that Bed Bath’s market cap is roughly 13% of its market cap. Of course, we have to bear in mind that this will take away some bottom-line profitability from Bed Bath’s operations, but Bed Bath is in desperate need of cash to strengthen its balance sheet — pruning back on its portfolio makes substantial sense.

Further, previously Bed Bath declared that through non-core asset sales it would generate about $400 million. Seeing that PersonalizationMall.com is earmarked for roughly $245 million, this could well mean there’s an additional $150 million that could be fetched through additional asset-based optimization sales.

This would imply that total asset divestitures would bring in close to 20% of its market cap — a substantial amount of cash for a company being priced in the bargain basement.

Source: 2024 Bond Pricing

And as you can see above, creditors have clearly given Bed Bath the benefit of the doubt, making it easier to source credit markets if needed.

Valuation — Wide Range of Possibilities

Bed Bath wants to position itself for a ”digital-first shopping environment”. I question just how much that’s possible? Is this just a buzzword heavy vision of what investors want to hear? Or this an actual possibility?

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I’m not of fan of making too many assumptions when investing. However, we ultimately make some assumptions, best case guesses and the rest is a leap of faith. No amount of preparation allows one to see the future.

The biggest investment risk here is that all Bed Bath’s efforts to be a digital-first company fail and the stock falls back down at least 50%, to early March levels.

The reasons why Bed Bath would fail include an inability to take any market share in a highly fragmented online market where customers strive for meaningful bargains and Bed Bath struggles to remain competitive against lower-priced online competitors.

But given that during June Bed Bath was cash flow positive, even if we know that a huge portion of that would have been driven by inventory being liquidated and other non-recurring working capital benefits. However, even considering this, the company clearly has ample flexibility.

Even if we assume further social distancing measures as well as possible lockdown being reinstated, there’s still ample cash on its balance sheet.

To illustrate, at the end of Q1 2020 Bed Bath carried $1.7 billion of debt, which was offset with $1.2 billion of cash and equivalents. These figures have moved slightly since the end of May as Bed Bath drew down $850 on an asset-backed revolver, as well as some early tenders, making its final net debt positions difficult to conclude.

However, we can reasonably assume that Bed Bath still has more than $800 billion of cash on its balance sheet, even if that’s offset by slightly higher debt.

Nonetheless, if Bed Bath is able to continue its momentum into its high season of Q3 and Q4 2020, and generate some cash flows even at half the level of 2018, this could mean that in 2021 Bed Bath could generate more than $300 million of free cash flow. Note, Bed Bath is a highly seasonal retailer, with the bulk of its profits made in Q4 — a strong Q4 period could substantially improve its position.

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Also, more recently, during 2019 Bed Bath also for that year made slightly more than $300 million of free cash flow.

Assuming that Bed Bath’s free cash flow has a legitamate plan to generate free cash flow similar to what it made in 2019, this would leave Bed Bath trading for less than 6x free cash flow, which is incredibly cheap in the present stock market environment for a company with a legitimate plan to grow its operations.

As a comparison, Williams-Sonoma (WSM) trades for roughly 10x free cash flow, which is a meaningful larger multiple to my conservative $300 million free cash flow estimate for Bed Bath, if it’s able to improve its digital operations.

The Bottom Line

Out of favor retailer, which is still free cash flow positive is being valued very cheaply. Assuming digital sales continue to pick up momentum, this stock could reprice materially higher.

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Disclosure: I am/we are long BBBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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