In my last article about Bed Bath & Beyond (BBBY) published on April 13th, I argued the company will survive the Corona pandemic. We’re a couple of months and earnings results later and the stock market has turned around about Bed Bath as well. The stock price went from about $5.5 to $11 in this short time. Since then, Bed Bath outperformed the S&P 500 (SPY) and retail ETFs (XRT, FTXD). The market agrees that Bed Bath will survive.
Next Update: Investor Day In October
A lot changed since April for Bed Bath. During the first quarter results, it announced cost savings of $250 to $350 million. Some of these cost savings will come from 200 store closures, which will also reduce overall revenue. This should move the profitability higher. It completed the previously announced divestment of PersonalizationMall.com. This turned the abysmal results of the first quarter into a positive look forward. Bed Bath hosts an investor day in October where it will share more details about previous actions and short- and longer-term goals.
I believe the investor day will be an important moment for Tritton. He is a year CEO by then and wants to prove himself. His new management team will have to prove its worth then. A solid strategy with challenging but realistic goals should get the market excited again about Bed Bath.
Balance Sheet And Cash: Still Strong To Survive
Bed Bath burned cash during its first 2020 quarter from March to May. The lockdowns and store closures forced it to shift to a digital-only company. It expected positive cash flow in June as stores reopened. Along with the available cash and a new asset-based revolving credit facility (ABL), this provides for substantial liquidity. This doesn’t even include the sale of PersonalizationMall.com for $245 Million.
Bonds Recovered Along With The Share Price
Bed Bath’s bonds recovered decently since the March lows. They are still far below par. This seems logical considering the deteriorating credit rating of Bed Bath. Debt investors are still skeptical about the future of Bed Bath but a lot less than in March.
Source: Business Insider
Adjusted EBITDA And Improvements
Bed Bath wants to improve EBITDA by $250 to $350 Million in addition to the previously announced reduction of $85M in selling, general, and administrative expenses (SG&A). These improvements should be added to the 2019 FY adjusted EBITDA.
This would mean the EBITDA rises to $800 Million with the lowest projection. I believe this shows the potential of Bed Bath. Based on the current enterprise value (EV) of $4.4 Billion, this would mean Bed Bath is only valued at an EV/EBITDA of 5.5 today.
Bed Bath Looks Cheaply Valued
As mentioned above, the EV to EBITDA based on assumptions is 5.5. This is cheap both to its historic valuation and peers. Williams-Sonoma (WSM) is for me the most comparable with Bed Bath. It’s focused on the same niche of home furnishing. Williams-Sonoma is a lot further along with the omnichannel approach. This explains the large difference in valuation. Williams-Sonoma trades around an EV to EBITDA of 11. This could show the potential of Bed Bath.
Another way to compare them would be the EV to revenues ratio. This shows an even larger discount for Bed Bath:
There are a few good reasons for this difference in valuation. Williams-Sonoma had a steadier revenue growth for the past years. It also sells a lot more through online channels than Bed Bath. I believe this shows the potential of Bed Bath as it changes into an omnichannel retailer.
Short Interest Is Still High
Bed Bath short interest hovers around 60% of the float. The short interest peaked in June and came down a bit since then. It remains at a high level. This is both a risk and an opportunity. It’s a risk because it shows a lot of investors don’t believe the turnaround story CEO Mark Tritton presents since his appointment. Short investors have a lot to lose and often do their homework thoroughly. I believe they are wrong on this one. The opportunity is the possibility of a short squeeze where shorters are pushed out by a rising share price. This could be a short-term catalyst to a higher share price.
The investment case in Bed Bath still revolves around the turnaround story. Tritton makes the right moves and communicates about a good-looking future. He built an experienced management team around him that could make it happen. Based on valuation Bed Bath looks cheap, if it can get back to better margins. This is the plan. Based on its projections, Bed Bath makes a sound investment.
In comparison to peers, Bed Bath’s valuation is inexpensive. This is an opportunity as the changes made by Tritton start to pay off. A revaluation more in line with peers offers a huge upside to the current share price.
The high short interest shows there is a lot of skepticism around Bed Bath. This makes the stock more volatile. A short squeeze could drive the share price higher quickly.
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.
Additional disclosure: Any investments you would take after an article or discussions with me are your responsibility. You should do your own due diligence before an investment.