More Bad News for Bed Bath & Beyond

While Bed Bath attempts to pivot to better accommodate its customer base, adding options like Beyond-Plus ($29 for 20% off purchase plus free shipping, with around 1 million members expected by year end) and reinvigorating its website (with digital representing more than 10% of sales), we don’t think such efforts are enough to either differentiate the company’s business model or restore operating margin performance to historic double-digit levels, leading to mid-single-digit ROICs that are well below our 9% weighted average cost of capital estimate, which supports our no-moat rating. We don’t plan to make any material change to our $17.50 fair value and view shares as fairly valued, trading at 8 times the firm’s updated 2018 EPS estimate versus our average 4% EPS decline forecast over the next five years.

Bed Bath continued to lose share of the home furnishing market, growing at a flat pace in the first half of its fiscal year versus a market that increased 5%. Our long-term outlook forecasts the firm ceding share over the next decade with expected sales declines of 2% on average hindered by accelerating store closures as leases come due (the firm expects 40 closures this year, offset by 20 openings). A languishing top-line should precipitate difficulty in leveraging the cost structure and thus the operating margin, which we have reaching back to around 5% over our forecast from an estimated 4% in 2018.

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