Omnichannel retailer Bed Bath & Beyond Inc. (BBBY) in Union, N.J. offers a range of domestic merchandise and home furnishings. It also operates an online interior design platform that provides personalized home design services. The retailer’s shares skyrocketed in price last year due to a short squeeze. However, the gains were not lasting, and the stock slumped to its 52-week low of $12.51 on Jan. 11, 2022.

The company delivered fiscal third-quarter results on January 6 that missed analysts’ top-line expectations. BBBY also slashed its outlook for the year. Although the shares dived on the news in pre-market trading, they closed the session up about 8%, thanks to the retail investors’ interest. The stock’s price surge, despite its disappointing results and outlook, can also be attributed to a rise in retail investor interest. BBBY remains among the most heavily shorted stocks. The stock has gained 9.4% in price over the past five days and 9.3% intraday to close yesterday’s trading session at $15.10.

The company is currently focusing on turning around its business by revamping its stores, adding private label products, and closing underperforming locations. However, BBBY grappled with inventory shortages in its latest quarter due to supply chain bottlenecks that cost it some  $100 million. The issues had a greater impact during December, despite solid consumer demand.

Here is what could shape BBBY’s performance in the near term:

Bleak Financials & Outlook

BBBY’s net sales decreased 28.3% year-over-year to $1.88 billion in its fiscal third quarter, ended November 27. They missed analysts’ $1.95 billion expectation. The decline in net sales can be attributed to a decrease related to a planned reduction from non-core banner divestitures and a core banner sale. The company’s gross profit stood at $668.92 million, up 30.1% from the same period last year, while its net loss grew 266.4% from its year-ago value to $276.43 million. The company’s non-GAAP loss per share came in at $0.25, versus the breakeven results expected by Refinitiv.

For the full year, BBBY expects an adjusted loss of 15 cents per share to breakeven, and sales of $7.9 billion, against its previous adjusted earnings forecast of 70 cents to $1.10 per share and sales of $8.10 to $8.30 billion. Wells Fargo analyst Zachary Fadem stated that the company’s fundamentals are “deteriorating,” and the company’s quarterly data reflects “choppy execution” by the management.

Consensus Rating and Price Target Indicate Potential Downside

Of 13 Wall Street analysts that rated BBBY, one rated it Buy, while six rated it a Hold and the other six rated it Sell. The $13.41 median price target indicates an 11.2% potential downside. The price targets range from a low of $9.50 to a high of $19.00.

Poor Profitability

BBBY’s adjusted gross margin improved 50 basis points to 35.9% in its last reported quarter. Improving profitability is a vital part of the company’s transformation strategy. “It’s really important to come back and show when we can get pricing right,” Chief Executive Officer Mark Tritton said. However, supply chain challenges and rising inflation could continue to be significant headwinds.

Furthermore, BBBY’s  6.44% and 2.97% respective trailing-12-month EBITDA margin and EBIT margin are 49.7% and 69.3% lower than the industry averages. Also, BBBY’s negative 40.08% and negative 6.92% respective  ROE and ROA compare with the 17.23% and 5.88% industry averages.

POWR Ratings Reflect This Bleak Prospects

BBBY has an overall rating of D, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Stability, which is consistent with its 1.70 beta.

BBBY has an F grade for Sentiment. This is justified because the Street expects its revenues to decline 20% in the current quarter and 14.4% in the current fiscal.

Of  61 stocks in the  Home Improvement & Goods industry, BBBY is ranked #53.

Beyond what I have stated above, one can also view BBBY’s grades for Value, Growth, Momentum, and Quality here.

View the top-rated stocks in the Home Improvement & Goods industry here.

Bottom Line

Although the home improvement market flourished due to robust demand during the pandemic, BBBY faced several supply-chain issues that caused its inventories and sales to decline. The company expects the headwinds to persist, which may, in turn, dampen its future results. Its EPS is expected to decline 80% year-over-year in the current quarter. Also, considering its negative ROE, we think the stock could be best avoided now.

How Does Bed Bath & Beyond Inc. (BBBY) Stack Up Against its Peers?

While BBBY has an overall POWR Rating of D, one might want to consider investing in the following Home Improvement & Goods stocks with an A (Strong Buy) rating: Masonite International Corporation (DOOR), Duluth Holdings Inc. (DLTH), and Acuity Brands, Inc. (AYI).

BBBY shares were trading at $14.70 per share on Friday afternoon, down $0.40 (-2.65%). Year-to-date, BBBY has gained 0.82%, versus a -2.71% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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