Bed Bath & Beyond’s Rebound looks too Springy

Any hint of improvement at the retailer was likely to move the needle dramatically.

By guest author Jinjoo Lee from Wall Street Journal

Judging by Bed Bath & Beyond’s BBBY +25.17% 30% share-price gain Thursday morning, one might assume the retailer reported some astronomical earnings.

In fact, its results were merely respectable. The retailer’s revenue fell 1.1% from a year earlier for the quarter ended Aug. 29, less than the expected 3.3% decline. Earnings per share were $1.75, much better than the negative number analysts had expected after six consecutive quarters of losses. But that figure was boosted by proceeds the company got from selling noncore business

So why the astounding price movement? One explanation could be that investors were ready to snap up the company’s shares at any hint of improvement. The retailer this year added a slew of new executives and started its turnaround plan; the company’s return to profitability could be taken as evidence that the previously flailing retailer is on the right path. A few analysts had also raised their price targets in the past few weeks, leading to some gradual share-price gains leading up to Thursday morning.

The other—perhaps less flattering—place to look is the remarkably high degree of short interest, which heading into earnings accounted for 61% of the company’s float, according to FactSet. These short sellers are apparently in a scramble to cover their position after the company’s better-than-expected results.

Nevertheless, the company’s numbers show some signs that its turnaround plan is bearing fruit. Digital sales are gaining substantial traction, growing 89 % in the most recent quarter and making up for the comparable-store sales decline of 12 %. Online sales have come to account for roughly 32 % of the retailer’s revenue, up from 18 % a year earlier. The company also recently said it would start a same-day delivery service, which should help boost sales during the holiday season.

Notably, the company was able to score gains even in challenging categories, which could be a sign that its merchandising and inventory-planning skills have improved. For example, its back-to-college sales actually rose 21 % last quarter compared with a year earlier, despite challenging and unpredictable school reopenings across the country. The retailer also cut back on coupons, which it previously relied too much on, leading to better gross margins.

With Thursday’s (October 1, 2020) rally, the company’s shares trade at 0.24 times forward sales, back to their valuation levels in 2018, before its net income swung to consistent losses. Some optimism is warranted, but in this case, investors might want to wait on the sidelines until the short interest noise quiets down.