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

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. 

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Disclosure: I am short UVXY/TVIX.

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