Bed Bath & Beyond: A Retail Tale Of The Walking Dead

As I watch the famed AMC series “The Walking Dead” I can’t help but to consider Bed Bath & Beyond (BBBY ) in the same regard. Sure Bed Bath & Beyond generates substantial amounts of cash flow from its floundering business operations but at substantially low gross margins, lower than last year and lower than those exhibited from financial crisis levels in 2008.In short, Bed Bath & Beyond is the quintessential Walking Dead retail operator. Bed Bath & Beyond is where Best Buy (BBY) and J.C. Penney (JCP) were in 2012. The two retailers named were in abysmal operating shape, leaving the retailers in a tough financial position as their respective stock prices plunged. 

The problem for Bed Bath & Beyond is akin to that of Best Buy in this analyst’s opinion. In short, the need for a Best Buy retail concept has already been proven futile. Circuit City having gone out of business in the early part of the century and a lesser concept in Radio Shack closing hundreds of stores suggests there’s not a long-term opportunity for a big-box, electronics store concept of scale. With Best Buy continuously restructuring its business over the last several years, it has found a substantial improvement, but off very depressed levels. As such the leveraged improvements may not be sustainable. 

Moreover, Bed Bath & Beyond may be a concept in retail futility or in search of continued declines.Like Best Buy, Bed Bath & Beyond had an exact competitor of scale that went out of business in the early part of the century, Linens N Things. There simply wasn’t room for two big-box, home goods retailers of scale and with the same store format and footprint. Where there is not room for two competing businesses should be a red flag in and of itself. The market place always sends out signals to investors concerning business models, it’s just a matter of time before that signal takes effect in the business model, which has been doing so in Bed Bath & Beyond for several years now. Where strong cash flows can last far longer than sales and earnings growth, the share price can also mask underlying problems with the business model. 

Shares of BBBY have benefited from strong cash flow in previous years, but only to suffer a greater decay in the present. Sales and earnings now decline to a greater degree than can be offset by putting cash flow to work through buybacks and dividends. Despite significantly reducing the float in 2016, buybacks have not been able to mask earnings declines. It’s a more serious problem than other analysts currently represent in their forecasts. In fact, the gross profit margin decline expresses the real story, outlines the path for which Bed Bath & Beyond has been walking and Walking Dead.In short, this year’s performance could easily, very easily been forecasted given the steady declines in gross profit margins since 2011. Bed Bath & Beyond, despite its many acquisitions over the years, many initiatives, millions of dollars of shares repurchased, initiating a dividend and billions of dollars spent building its omni-sales channel, business is exhibiting declining earnings and declining same-store-sales. 

Given the aforementioned money spent by the retailer and numerous attempts at growing profitability without success, it pains me to see authors and analysts suggest that pulling back on capital spending will benefit the company. There’s quite literally no logic to such an offering. If you can’t grow profit margins given all the company has put forth, there is obviously a structural problem with the business model that need to be addressed. Cutting capital spending might do little more than conserve capital, but it certainly won’t grow sales and profits. Linens N Things attempted to conserve capital only to find itself acquired by Apollo Global Management for $1.3bn in 2006, before going out of business in total. But don’t get me wrong, should Bed Bath & Beyond reduce capital expenditures substantially, profits will get a bump in the short-term, and that is where you would look to sell stock at hopefully higher prices.Higher share prices will not last in such an equation for the retailer as has been proven historically. 

Bed Bath & Beyond is in greater trouble than the slight sales decline and greater earnings decline may be exhibiting to date. Keep in mind that most every bit of sales growth is coming from acquisitions, the opening of new stores and digital sales. None of these variables is a long-term solution to growth, but mere band-aids sourced to stem the glaring metric declines. The Walking Dead activities the company engages in are akin to a cat chasing its tail; they are acts of futility. 

A great portion of Bed Bath & Beyond’s business comes from soft goods and soft goods will always find the greatest portion of sales considered through brick and mortar storefronts. There is a total addressable market (TAM) for online sales of soft goods that will better understood in the years to come. But what can be logically deduced as to why soft goods are not purchased at the same rate as hard goods through online channels is that consumers like to touch and feel soft goods. Presently, like Bed Bath & Beyond’s online sales, soft good online sales are growing off of a very small base. It’s for these reasons, Bed Bath & Beyond’s online efforts/push can’t move the needle for the company and could be described as futile. Would the retailer be better off dedicating its capital to adjusting its assortment of goods in stores while amending its store footprints and concept? I think it’s safe to suggest the company has acknowledged its store concept is challenged and is taking baby steps toward adjusting its concept with its shopping venue “Beyond at Liberty View”, located in the Sunset Park community within Brooklyn.With approximately 120,000 ft.², this is a unique shopping destination that includes Bed Bath & Beyond, buy-buy BABY, Cost Plus World Market, and Face Values, all under one roof.

The problem with Beyond at Liberty View is that it took roughly 2 years to develop and the retail landscape for such duplications of this concept are limited in North America.In a sense, Bed Bath & Beyond spent a lot of time and money to develop another concept it simply can’t scale fast enough or without a drag on total business profitability. 

Online sales won’t make or break Bed Bath & Beyond as has been proven in recent years.What will make or break the retailer is its business model and brick and mortar concept that has been left unchanged for decades. (AMZN) won’t and hasn’t killed Bed Bath & Beyond. Every retailer of scale will and has achieved a piece of the e-commerce business over the last decade or so. Bed Bath & Beyond’s problem is like-products at relatively cheaper prices found at discount retailers such as Target (TGT) and Wal-Mart (WMT). And with these two retailers having more than quadruple the retail footprint of Bed Bath & Beyond, the math simply doesn’t work out well for the much smaller retailer. Where Bed Bath & Beyond might have one store in a major metropolitan area, Target may have up to 3 storefronts, Wal-Mart as many as 5 storefronts. The consumer has to have a dedicated reason, a decision to spend more in order to drive to that solitary Bed Bath & Beyond location while surpassing Target and Wal-Mart. Bed Bath & Beyond has a concept and retail footprint problem that is extremely difficult to address in the 1st century. Remember Service Merchandise? Let’s hope Bed Bath & Beyond can revive itself from the Walking Dead status. Unfortunately, few have in the past, especially those with such a specific product assortment.

Many analysts have reduced their expectations for shares of BBBY going forward. Given that most still reflect a bottoming in 2017 and a $40+ price target, it doesn’t seem as though the analysts are appreciating history or metric declines in perpetuity. In most every single analyst report I’ve read since Bed Bath & Beyond’s issuance of Q3 2016 results, none provide a reasonable solution to the ails of the business or reasoning for a bottoming in profits. 

Disclosure: I am short UVXY/TVIX.

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