Lowering No-Moat Bed Bath & Beyond Fair Value Estimate

We are reducing our fair value estimate on no-moat Bed Bath & Beyond BBBY to $17.40 from $23.50 after adjusting our 2022 sales and EPS outlooks lower. Specifically, we now project a sales decline of 6%, to $7.4 billion in 2022, lower than the $7.8 billion we had expected previously as we surmise our prior estimate is now out of reach given that comps were tracking a 20% decline through mid-April, the halfway point of its first quarter. Similarly, our full-year EPS projection now stands at a roughly $2 loss, from a $0.23 loss prior. Even with modestly improving sequential performance over the remainder of the year, we think it will be difficult to control top-line degradation given the impact persistent inflation could have on consumer spending. Additionally, we have reduced our above breakeven operating margin projection for 2022 to a low-single-digit loss as we don’t expect any pricing gains will be enough to offset higher costs absorbed during the year.

Although we expect slower near-term profit improvement, this does not impact our long-term outlook. Our forecast has consistently been less sanguine than company guidance. Bed Bath targeted a gross margin of 38%, EBITDA of $850 million-$1 billion, and a high-single- to low-double-digit EBITDA margin in 2023, but we plan little change to our more conservative 2023 expectations for a 35% gross margin and just under $400 million in EBITDA (5% margin). Longer term, when demand stabilizes, we think a cleaner-inventoried, location-optimized Bed Bath could deliver mid-single-digit operating margin results. While this profitability would be significantly lower than historical levels, it points to fair upside from current operating conditions, rendering shares attractive.