Bed Bath & Beyond Demand Stalls Amid Constrained Consumer Environment

We plan to lower our $17.40 fair value estimate for no-moat Bed Bath & Beyond (BBBY) by around 20% after digesting dismal first-quarter results that included a 25% sales decline, a 620-basis-point impact from inventory obsolescence, and a c-suite shake up. A midteens price decline after the print renders shares undervalued, but we caution investors that it could take another two to three quarters before any signs of improvement arise. Commentary that there were issues in inventory, “that we will be working to actively resolve,” implies we are likely to see further inventory write-downs ahead, giving little hope that there is any potential for positive profitability over the near term. The adjusted quarterly EPS loss of $2.83 excludes $1.66 in charges for inventory and port fees, which are unlikely to be replicated, but is still miserably below the $0.05 in positive EPS the firm was able to capture in the year-ago period. The macroeconomic environment was noted as a key factor in purchasing pattern changes, and we surmise Bed Bath is set to be disproportionately impacted by its exposure to a mid- to low-income consumer base that is meaningfully impacted by inflation and acutely sensitive to price.

Given Bed Bath’s stalled turnaround progress, it has also executed significant management changes, most importantly naming independent director Sue Gove interim CEO (replacing Mark Tritton) and relocating Mara Sirhal to chief merchandising officer (from the Harmon brand). We expect efforts to emphasize extracting value from the brands in the portfolio through stronger sales and cost savings. But such sentiment reads like a broken record, echoing efforts multiple management teams have articulated over the last five years, and we think this has turned into a show-me story. We will hold our standard stewardship rating intact until we assess a more thorough evaluation of the turnaround, which the company plans to reveal later this summer.