Bed Bath & Beyond Looks Beyond its Meme Stock Days

During the Reddit-fueled short squeeze days of late-January Bed Bath & Beyond (NASDAQ:BBBY) was among the companies targeted by retail traders. In a matter of a few days the highly shorted stock doubled making it one of the most notorious meme stocks.

Three months later, the stock has returned to where the madness began. Investors have gone back to evaluating Bed Bath & Beyond on its fundamental merits and the company has gone about its business selling soaps, towels, and the like.

With this bizarre episode now in the past, can Bed Bath & Beyond trend back towards its meme peak in a more traditional fashion? Or is the mall-based retailer yet another casualty of the e-commerce revolution?

In its first quarterly report since the squeeze, Bed Bath & Beyond tried to show investors that it can thrive in the post-pandemic economy. 

How Did Bed Bath & Beyond Perform in Fiscal 2020 Q4?

Bed Bath & Beyond's fiscal 2020 fourth quarter ended February 27^th. It certainly wasn't business as usual during the holiday quarter, but the company fared still fared well. Comparable store sales increased 4% driven by an 86% surge in digital sales.

Net sales, however, were down 16% to $2.6 billion and fell short of the Street. Adjusted EPS came in at $0.40 which was a two-cent improvement over the prior-year quarter and far outpaced the consensus expectation of $0.31.

So, while the headlines make this a mixed result, it did mark the third straight quarter of comp sales and profit growth. More importantly, sales in the core BBBY business grew 6% which gives credence to the company's plan to shift its focus back to its core brands. A 20-basis point expansion of the gross margin to 32.8% was also an encouraging sign as this too is a tenant of Bed Bath & Beyond turnaround strategy.

What is Bed Bath & Beyond's Growth Strategy?

It won't come as a surprise that Bed Bath & Beyond's plan to stay relevant in the quickly evolving world of retail it to invest in its digital platform. Its online storefront and app gained traction as FY20 progressed. More than 10 million new customers turned to the online channels driving digital sales of more than $3 billion.

Outside of digital, Bed Bath & Beyond's transformation involves shedding non-core businesses, reducing inventory, and focusing on sustainable profit growth. Last year it sold five non-core businesses, cut inventory by 20%, and pivoted to a gross margin focus. As part of the margin expansion strategy, it plans to launch at least eight in-house brands in FY21. How well these new lines are received by customers will go a long way in improving profitability as private owned brands tend to have higher margins.

In the meantime, Bed Bath & Beyond is moving forward with plans to reduce its store footprint after closing 144 stores in FY20. An additional 200 stores are slated for closure in FY21 as the company transitions to a more digitally focused model.

In the new fiscal year Bed Bath & Beyond is targeting $8.0 to $8.2 billion in sales, a 35% gross margin (from 32.8% in Q4), and adjusted EBITDA in the $500 million to $525 million range. Next quarter will be an apples to oranges comparison because of the store closures that occurred in the first quarter of FY20, but the market will be looking to see if the company is on track to meet its ambitious 40% sales growth target. Continued strength in the digital business will help but ultimately store traffic will need to improve significantly.

Is Bed Bath & Beyond Stock a Buy?

Bed Bath & Beyond seems to have a sound strategy in place that can allow it to remain relevant in the post-pandemic world. It is a slimmer version of its former self with a focus on four core businesses. Gross margins are trending in the right direction and can continue to do so if management can execute on its three-year growth strategy.

Digital sales growth will continue to be a key theme to watch here. The extent to which customers embrace the Bed Bath & Beyond app even as store operations normalize will largely dictate whether sales targets are reached. If interest in online channels fizzle out, left with a reliance on mall and plaza traffic, Bed Bath & Beyond may be in for a rough ride. And with a much smaller store footprint, the company's surviving stores would have to deliver some big-time results.

Much like when the short squeeze occurred, the sell-side view on Bed Bath & Beyond remains skewed to the negative side. It will be interesting to see if analysts turn more bullish after the Q4 report and give more value to management's transformation plan.

In the meantime, it may be best to sit on the sidelines. The company did report an impressive bottom line beat and appears to be moving in the right direction. But with so much uncertainty in the retail industry, Bed Bath & Beyond remains a 'show me' story. More evidence of a sustainable turnaround is needed here—but at least the BBBY-related emojis have quieted down.