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With a Hollow Turnaround Story, Don’t Pin Your Hopes on BBBY Stock

Laura Hoy

Home goods retailer Bed Bath and Beyond (NASDAQ:BBBY) is slated to report its fiscal first-quarter results after the bell on July 10. The firm is expected to post EPS of $0.08 on revenue of $2.58 billion, which would reflect a 75% and 6.3% decline respectively from the year-ago quarter. BBBY stock appears to have the lackluster earnings already priced in, trading at $11.14 per share- just 5.6 times its forecasted earnings.

Is A Bed Bath & Beyond Stock Turnaround Just Around The Corner?

Source: Mike Mozart via Flickr

While analysts across the board are predicting doom and gloom when it comes to BBBY’s results, some are optimistic about the firm’s future. The analyst team at Bank of America Merrill Lynch (BAML) says this could be the final painful quarter before the company’s turnaround takes hold. 

This quarter may be particularly underwhelming according to BAML, whose analysts believe that the firm’s decision to reduce its reliance on coupons to get people in the door will be a good one in the long-term.

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The brand itself is well known for its 20% off coupon, but last quarter management said BBBY is planning to dial back on its coupons by making them harder to get and adding more exclusions.

That strategy, while positive for profitability, could hurt sales significantly and thus make Q1 comps for Bed, Bath and Beyond stock look even worse than they already are. 

Margins in the BBBY Stock Spotlight

One of the biggest pain points for BBBY has been margins, which have been on the decline for 11 quarters in a row. This quarter is expected to deliver much of the same despite efforts to cut down on coupon usage. 

Expect management to speak on this point, as it represents a huge part of the firm’s turnaround strategy. Unless the firm can cut down on expenses significantly or beef up sales to cover its costs, a rebound is impossible.

Speaking of sales, comparable store sales will be another closely-watched metric in BBBY’s Q1 results. Comps are expected to disappoint as well, which should come as no surprise since management said as much in its guidance for Q1 earlier this year.

Growth Plans

While things are not looking great for BBBY stock at the moment, management believes the firm is on the cusp of a turnaround. The firm’s main focus is to drive traffic to its stores- by renovating them, relocating them and expanding into new areas.

The firm is also hoping to improve customer engagement by building out Next Generation Lab stores that will offer a unique shopping experience. 

Digital sales are another avenue that management hopes to continue building out in order to boost revenue. Sales through BBBY’s digital channels will be a good measure of how the firm’s turnaround efforts are going, as BBBY saw growth in that sector in previous quarters. 

Ultra-Low BBBY Stock Price

BBBY’s share price is trading near all-time lows, which suggests that investors have already priced in the poor Q1 results. However, BAML argues that the earnings disappointment is more than priced in, making BBBY an opportunity. BAML analysts pointed out that Bed, Bath and Beyond stock is trading below where it was when activists stepped in and its CEO was ousted. 

As with any underdog stock, it all boils down to whether or not you think BBBY’s turnaround will ever materialize. If you’re skeptical, then the firm’s current share price is fair. If you think management is on the right track, then now would be a great time to add Bed, Bath and Beyond stock to your portfolio.

Turnaround Unlikely

I’m skeptical. While I agree there’s an opportunity to be had if BBBY is able to execute and turn things around, it’s too risky to appeal to me. BBBY’s customers are reliant on coupons and trimming their availability is likely to send them to shop at another store.

Unfortunately for BBBY, switching costs are extremely low and there’s really nothing keeping people coming back to Bed, Bath and Beyond aside from the coupons.

Time Will Tell for BBBY Stock

The upcoming Q1 results are important for BBBY investors because they should offer some idea as to whether the firm’s turnaround strategy is achievable. This quarter could offer some insight into whether or not cutting back on coupons has had a major impact on traffic.

Plus, management’s guidance for the full year will be a good indication as to whether or not this will be the last painful quarter for BBBY investors.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.

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