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Bed Bath & Beyond Surges 66% on Solid Transformational Gains

Zacks Equity Research

Bed Bath & Beyond Inc. BBBY stock has surged 66.2% in the past three months, owing to solid gains from its transformational efforts. Moreover, management is confident of accomplishing its financial targets, which include delivering growth for net earnings per share by fiscal 2020.

Notably, the Zacks Rank #3 (Hold) stock has outperformed the industry’s 6.8% decline in the same period. Further, a VGM Score of A speaks of the stock’s solid run on the bourses.

Delving Deeper

As part of Bed Bath & Beyond’s Transformation Plan, management targets achieving four major near-term priorities — stabilize and boost top-line growth; reset the cost structure; review and optimize asset base with its portfolio of retail banners; and refine the organization structure. The transformation plan’s update provided in September 2019 states that the company aims to rapidly refurbish 160 namesake stores before the upcoming holiday season.

 


 

Moreover, the company anticipates aggressive inventory reduction of $1 billion for the next 18 months, with the removal of older surplus inventory from its stores before the holiday season. This will help it reset inventory faster in both its stores and distribution centers. Moreover, its cost-saving and other short-term actions, and the reduction of corporate workforce are projected to reduce costs by $10 million, which is likely to improve margins.

Speaking of the company’s store-rationalization endeavors, it remains focused on expanding its store base and increasing the productivity of existing stores to fuel top-line growth. In second-quarter fiscal 2019, it closed two stores and remodeled around 75 existing outlets. The majority of remodeled outlets were Next Generation Lab stores, wherein different experiences and visual merchandising are expected to boost customer shopping experience.

Apart from making efforts to boost store operations, Bed Bath & Beyond is concentrating on growth of its digital channels. It is making constant investments to significantly improve the search and recommendation functionality of its site and mobile app. Moreover, management is planning to convert the Reserve Online Pickup In-Store capability to Buy Online Pickup In-Store to improve experience as customers can quickly pick up purchased products from the store, with conveniences such as curbside pickup or lockers.

Impressively, changes made across the digital platform are yielding sturdy results, as evident from mobile app sales growth of more than 90% year over year in the fiscal second quarter.

Despite these positives, Bed Bath & Beyond displays a dismal top-line trend, driven by soft comparable sales (comps) on lower store transactions. However, comps growth was somewhat mitigated by rise in the average transaction amount.

Nevertheless, we remain confident that the aforesaid efforts will help bring the top line back to growth path. With respect to its financial goals, Bed Bath & Beyond targets reaching mid and long-term revenue growth, near-term gross margin expansion, near-term SG&A improvement, and outstanding sustainable operational support. Its focus on the portfolio alignment strategy — including product assortment, customer engagement, learnings from Next Generation Lab stores and expanded online experience — should boost revenues.

Further, changes in assortment mix to increase sales, supply chain, and modifications in pricing and coupon strategy will aid margins. The company expects to optimize SG&A through marketing initiatives, lower occupancy expenses and improvements in store labor model. It will also focus on spending on human capital, data and process improvement to reposition its flagship brand and reinforce global sourcing capabilities.

Some Better-Ranked Retail Stocks

Boot Barn Holdings, Inc BOOT has an impressive long-term earnings growth rate of 15%. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KAR Auction Services, Inc KAR, which is also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 14.5%.

The Michaels Companies, Inc MIK, which presently carries a Zacks Rank #2 (Buy), has an expected long-term earnings growth rate of 7%.

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