Actions of Bed bath and beyond (NASDAQ: BBBY) lost a quarter of their value after the home goods retailer posted second quarter tax results well below expectations.
While sales have been affected by an increase in COVID-19 cases that has led consumers to shy away from stores, the company is in the midst of an existential turnaround and cannot afford to delay its recovery.
Although the retailer was punished by the market because of the setback, it could well represent a buying opportunity for investors. I wouldn’t be arguing for an all-in on Bed Bath & Beyond, but there’s good reason to think its action is worth considering at these depressed levels.
Growth that is running out of steam
Sales fell 26% in the second quarter on a 1% drop in same-store sales. CEO and Chairman Mark Tritton said the quarter got off to a good start, but “In August, the last and most important month of our second fiscal year, traffic slowed down significantly and as a result sales did not materialize as we had foreseen it “.
The decline was particularly marked in Florida, Texas and California, three states of particular importance to the home goods retailer as they represent a large portion of its revenue.
It wasn’t that bad, as much of the drop in sales (around 15 percentage points) was the result of the sale of various non-core businesses, such as Cost Plus World Market and Christmas Tree Shops.
Additionally, the Buy Buy Baby banner saw comps rise by high percentages of teens throughout the quarter, and the period marked Bed Bath & Beyond’s fifth consecutive quarter of adjusted profitability.
Free cash flow was essentially neutral as operating cash flow of $ 75 million was offset by $ 76 million in capital expenditures related to store renovations, chain improvement. procurement and investments in computer systems. But capital spending will soon decline as stores are modernized and the business will start making cash profits again.
Always focused on her heart
Bed Bath & Beyond once seemed like it could follow the path of its former rival Linen-n-Things, which collapsed until it finally declared bankruptcy. But the home goods retailer seems to have a good chance of turning the business around.
He’s made a fresh start with a new board and management team led by Tritton, and is sticking to his knitting. The retailer considers its namesake stores Bed Bath & Beyond, Buy Buy Baby, Harmon Face Values and Decorist to be its primary brands, and although it is difficult to fully understand its performance against 2019 numbers since it has lost non-core assets. , aside from what appears to be a hiccup due to the sudden spike in COVID-19 cases linked to the delta variant, the company still appears to be on the right track.
Tritton maintains that Bed Bath & Beyond’s higher margin store brands are making greater sales penetration, above what the retailer expected. In addition, its long-ignored digital presence is growing well above the 2019 rate “to nearly double the proportion of sales”.
Clearly, it is clear that the household goods chain is still weak so early in the turnaround, but it foresees a strengthening sentiment and investors should focus on the potential.
Too cheap to pass up?
The stock of Bed Bath & Beyond is very inexpensive. While you can say it’s for good reason, it also represents an opportunity.
Stocks earn less than eight times the projected profits, a tiny fraction of its sales, and about four times the free cash flow it produces. This marks a company that was beaten because it looked like it was on the verge of demise, but now also rules out that it never finds its way home.
It seems short-sighted to me, and as I’ve noted before, I wouldn’t make Bed Bath & Beyond stocks a significant part of my portfolio. But the home goods retailer seems too cheap to ignore at these levels.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.