BBBY Stock Will Keep Pushing Higher Because Its Management Is Doing Everything Right

Throughout 2020, Bed Bath & Beyond (NASDAQ:BBBY) stock has been one of the market’s best turnaround stories, with its shares surging more than 600% off their coronavirus-induced March lows.

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That’s partly because consumer spending has risen since then and partly because Bed Bath & Beyond’s management is doing everything right to turn this sinking ship around.

Guess what?

Consumer spending is only going to keep improving into 2021. At the same time, the retailer’s management will keep doing everything right for the foreseeable future to improve Bed Bath & Beyond’s value proposition, relevance and profitability.

Consequently, despite its 600%-plus rally over the past seven months, BBBY stock will keep pushing higher. Within the next few years, I believe that it can soar close to $40.

So stick with BBBY stock.  Its rally isn’t over just yet.

Improving Macro Trends

The external environment surrounding Bed Bath & Beyond has steadily improved over the past few months and will continue to do so for the foreseeable future.

When the Covid-19 pandemic first struck back in March, consumer spending dried up as everyone stayed at home and stopped doing things. Since then, however, the world has adapted to the pandemic. We’ve gone back outside, but we are wearing masks. Stores have reopened, but they’re enforcing social distancing rules. Restaurants are open, but they’re mostly restricted to outdoor dining.

Thanks to these innovative adaptations, the world has been able to reduce the negative impact of the virus over the past few months, while also undergoing a healthy economic recovery and progress towards normalcy. The backbone of this recovery has been a strong and steady rebound of consumer spending, which today sits only 5% lower year-over-year (versus a 41% drop in late March).

As consumer spending has rebounded, Bed Bath & Beyond’s sales trends have increased, too. Net sales at the home goods retailer dropped 49% YOY in the first quarter of 2020, but they declined just 1% YOY in Q2.

External conditions will continue to improve for Bed Bath & Beyond, mostly because consumers, businesses and legislators alike are only getting better and better at the Covid-19 balancing act. As consumer spending continues to recover over the next few quarters, Bed Bath & Beyond’s sales trends will follow suit.

Of course, this sustained sales rebound will provide continued support for BBBY stock.

Improving Internals

More important than the improving external conditions, the internal operating environment at Bed Bath & Beyond has markedly improved over the past few quarters — and will only continue to rebound into 2021.

Long story short, a new management team led by the widely-respected Mark Tritton — who was the former chief merchandise officer at Target (NYSE:TGT) — has come in and changed everything in order to help Bed Bath & Beyond turn into the preferred omni-channel destination for home goods.

Some of those changes include revamping storesrightsizing the real estate footprint, and investing in e-commerce. The retailer has also built omni-channel capabilities like BOPIS (buy-online, pick-up-in-store), while significantly reducing its operating expenses, and retooling the supply chain to improve its gross margins.

As shown by the company’s second-quarter earnings report, these changes are working. For the first time in several years, Bed Bath & Beyond reported positive comparable sales and meaningfully grew its profits year-over-year.

Management is not resting on this early success or slowing down; instead, it continues to push full-speed ahead when it comes to modernizing and improving Bed Bath & Beyond. Most recently, the company struck separate deals to sell its Christmas Tree Shops retail banner, its Linen Holding business and a distribution center in New Jersey. Those deals cumulatively netted the company about $250 million, a sizable chunk which will go towards improving the firm’s core business.

Bed Bath & Beyond’s management is doing everything right to turn the sinking ship that was Bed Bath & Beyond for most the 2010s, into a strong omni-channel home-goods retailer in the 2020s.

As long as it keeps doing everything right amid this transition, BBBY stock will keep flying higher.

Bed Bath & Beyond Can Climb Much Higher

My estimates indicate that BBBY stock could rise to $40 within the next few years as the company’s big turnaround plays out.

The U.S. furniture and homeware market is expected to grow by 2% to 3% per year over the next few years. For years, Bed Bath & Beyond has seen its share of that market eroded by mismanagement of its business. The new management team should help the company stabilize its market share, leading to 2%-3% sales growth.

Gross margins should improve as its pricing strategies and demand improve and consumers use fewer coupons. Its operating-spending rate should fall as the company closes underperforming stores, invests in automation technology and leans more into e-commerce sales. Bed Bath & Beyond’s  profit margins, therefore, should expand meaningfully over the next few years.

If they do, then its 2% to 3% sales growth will translate into roughly 10% annualized profit growth after the pandemic. Based on that assumption, my modeling suggests that Bed Bath & Beyond is on track to generate earnings per share of about $3 by 2025.

The current turnaround of Bed Bath & Beyond reminds me a lot of the turnaround that Best Buy (NYSE:BBY) staged over the past few years. During that turnaround, BBY stock normally traded at  a forward price-earnings multiple of 13 times.

Let’s say that BBBY stock does the same. A 13-times forward earnings multiple on 2025 earnings per share of $3 results in a 2024 price target for BBBY stock of nearly $40.

The Bottom Line on BBBY Stock

I’m exceptionally bullish on  Bed Bath & Beyond’s turnaround.

The company’s core home-goods market is supported by non-cyclical growth drivers, while the brick-and-mortar component of that market has long-term staying power. Bed Bath & Beyond is a leading physical player in that space, but its brand and business were mismanaged for years. Now they are being managed perfectly, and the company’s growth trends today look about as good as they have in five years.

As long as the retailer’s management team keeps executing flawlessly, Bed Bath & Beyond’s growth trends will continue to meaningfully improve, and BBBY stock will keep pushing higher.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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