Retail giant Bed, Bath & Beyond (BBBY) was one of several stocks to reach new heights in early 2021 thanks to the meme stock movement on social media. Beyond this, does the stock have enough fortitude to chart a path for future growth without this help?
Alongside other so-called meme stocks such as GameStop and AMC Theatres, BBBY’s share price in January spiked, going from $18 per share to nearly $43 by the end of the month. The dramatic rise was primarily fomented by investors on r/WallStreetBets – a sub-page on Reddit.com where users regularly offer financial advice.
The rapid growth led some analysts to declare that these stocks were no longer trading on their fundamentals.
Despite a nearly 50% decline in share price since early June, some analysts see BBBY as a company that is poised for future growth. They point to the company’s expanding profitability and its cost optimization efforts to make their case.
Meanwhile, others see problems. A recent reassignment of media and entertainment companies into the newly formed Communications Services sector could spell trouble for overall retail market.
Focusing on core business
In a note to investors on 30 June (see below), Bobby Griffin, the vice president of Equity Research at Raymond James, described BBBY’s future growth as a “prove me story.”
After the company announced it was launching three new private-label brands in early June, investors balked and the stock price sank by nearly $15 per share. The move ended almost four consecutive weeks of growth in BBBY’s share price.
Despite the dip, Griffin says he is confident BBBY’s management team “understands the core issues within the business and has already started to show progress in recent results.”
Griffin points to the company $1.9bn of available liquidity, which he argues will give it “ample flexibility to tackle the turnaround.”
Cost optimisation
Another positive sign that analysts point to is BBBY’s focus on cost optimisation programs and shutting down unproductive stores.
Simeon Gutman, a managing director at Morgan Stanley, said in a note to investors on 12 July that the store closures, headcount reductions, and lower discretionary expenses all contributed to BBBY’s greater-than-expected EBITDA growth in Q2.
What is your sentiment on BBBY?
Gutman also commended BBBY for growing its margins through better “product sourcing, leverage of distribution costs, and higher-owned brand penetration.”
Market issues
Research from Argus released on 18 August paints a less rosy outlook for BBBY. The company recently downgraded the stock to a “Sell” rating because of concerns with the broader market.
“Consumers may reduce spending on household products as they work through the products they hoarded at the start of the pandemic. In the next year, retailers will lap the elevated results,” the research says.
At the same time, Argus says the reassignment of certain entertainment companies into a new sector could disturb the market and lead to a slight decline in earnings for the retail and hospitality industry.
Because of this, Argus anticipates consumer discretionary earnings to dip next year. The firm estimates discretionary earnings will increase by 48% by the end of the year before declining by 28% in 2022.
