Bed Bath & Beyond: Still Waiting On Sidelines

10/12/17

Bed Bath & Beyond (BBBY) is probably one of the cheapest companies currently trading on Nasdaq based on conventional metrics such as price to earnings or price to free cash flow. However, it was cheap even half a year ago based on these metrics, and it declined more than 40%. It was trading at multiples of 8.8 to forward earnings half a year ago, and now it is trading at a multiple of 7.3 price to forward earnings. Therefore, looking at conventional metrics, it was cheap when it was trading at $36, and it is cheap at current $22. But the reason why the market discounts the company is the rapid deterioration in operating margin. And this deterioration is set to continue this year and perhaps in future as well. As a result, I am still staying away even though I realize it is now approaching technical levels that coincide with a book value of the company. And so it may put a floor for some time and perhaps even rebound, but my investment thesis is the same as was half a year ago.

Bed Bath & Beyond in May


I wrote my first article about Bed Bath & Beyond in May this year. (Waiting For Signs Of Stabilization) At that time, the company was trading at $36.1 and the expected earnings for this year were 4.34. Therefore, the price to forward earnings was 8.2. My recommendation was to stay away from the stock given the profit margin erosion. The main argument was that the company traded at a cheap valuation for a very good reason, and the reason was that operating margin keeps declining very fast. In fact, the operating margin was declining every year since 2012.

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