E 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. 

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Disclosure: I am short UVXY/TVIX.

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