Bed Bath Rhetoric Signals Slower Housing-Related Growth

Facing external and self-inflicted headwinds, no-moat Bed Bath & Beyond BBBY printed second-quarter adjusted EPS of $0.04, well below the firm's guidance for $0.48-$0.55. It also missed on sales, generating $1.98 billion versus its $2.04 billion-$2.08 billion forecast. While we aren't shocked that the delta variant slowed foot traffic materially in August, we were disappointed there were also issues surrounding marketing spend; such missteps are already being remediated. However, in our opinion, there's little hope in alleviating supply chain congestion any time soon, and we expect smaller retailers to be disproportionately impacted by poor access to capacity in the near term. We think this, along with inflationary issues, support Bed Bath's restated 2021 outlook that now sees EPS of $0.70-$1.10, versus $1.40-$1.55 prior. Incorporating these concerns lowers our $23.50 fair value estimate by about $1, but we also plan to nudge 2022 sales and profits lower as we include ongoing (2022) supply chain headwinds. We view shares as modestly undervalued after falling around 25% post-print but caution investors that the return to sustained profit growth could be bumpy as global inventory throughput untangles. Management held that the higher costs it's now facing are transitory and is sticking to its 2023 forecast calling for a 38% gross margin. Admittedly, strides into private label have been executed well, but we note the home furnishings category tends to be competitive, and as such, we view this outlook as rich (our 2023 gross margin estimate is 35%). We don't plan to alter our long-term forecast for Bed Bath that calls for the stabilization of same-store sales at 1% and operating margin of 5%-6%. Bed Bath is one of the first firms we've heard call out slowing category growth, with traffic and search suppressed against its expectation. Given the difficult year-over-year comparisons for the industry, we anticipate hearing similar rhetoric from other housing-related firms ahead.

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