Bed Bath & Beyond Stock Up 29% in March – Time to Buy BBBY Stock?

The price of BBBY stock has gone up nearly 29% so far this month following news that the Chairman of the videogame retailer GameStop Corporation (GME), Ryan Cohen, amassed a 9.8% in the omnichannel retailer.

Shares of the parent company of buybuy BABY and Harmon ended yesterday’s stock trading session 34.2% higher at $21.71 after a letter sent by Cohen to BBBY’s Board of Directors was made public.

In the letter, Cohen criticized the performance of the company under the leadership of its current Chief Executive Officer, Mark Tritton, who has been awarded with over $27 million in the past two years despite the firm underperforming most of its peers.

“We believe Bed Bath needs to narrow its focus to fortify operations and maintain the right inventory mix to meet demand, while simultaneously exploring strategic alternatives that include separating buybuy Baby, Inc. (“BABY”) and a full sale of the Company” stated Cohen, acting as the Manager of RC Ventures – the company through which he bought his current stake at the firm.

Bed Bath & Beyond responded to Cohen’s letter by stating that the Board of Directors is “committed to acting in the best interests of our shareholders and regularly reviews all paths to create shareholder value”.

They added: “2021 marked the first year of execution of our bold, multi-year transformation plan, which we believe will create significant long-term shareholder value”.

Cohen’s involvement in Bed Bath & Beyond seems to have been greeted by Wall Street as a positive development for the company as reflected by yesterday’s pronounced uptick.

Mr. Cohen is a well-known activist investor and the founder of Chewy – a specialized online retailer in the pet care industry. He is also serving as Chairman of the Board at GameStop at the moment after he took a similar 13% stake in the distressed videogame retailer.

What could be expected from this retail stock following this interesting development? In this article, I will be assessing the price action and fundamentals of BBBY stock to outline plausible scenarios for the future.

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BBBY Stock – Technical Analysis

Shares of BBBY have gained nearly 49% so far this year and were already on positive territory even before yesterday’s news came out.

Even though the company missed on analysts’ estimates for both earnings and sales back in January when its financial results covering the third quarter of the 2021 fiscal year were published, the stock progressively climbed from $13 to $16 only two months after.

Meanwhile, yesterday’s uptick fully reversed the latest downtrend that BBBY stock had been experiencing with the price closing the day exactly at the 200-day simple moving average.

More than 105 million shares exchanged hands during the session – a figure that exceeded the 10-day average by more than 10 times. Even though shares rose more than 80% at some point during the day, the price settled much lower at $21.71 for a still eye-popping 34% gain.

This indicates that there was significant selling during the session, possibly as some long-term holders took advantage of the uptick to scale down their exposure to BBBY.

Momentum indicators are climbing to bullish territory with the Relative Strength Index (RSI) moving to 70 and near overbought levels while the MACD just climbed to positive territory upon crossing above the signal line.

All things considered, the mid-term outlook for BBBY stock seems bullish as long as investors believe that Ryan Cohen’s involvement in the company will have positive results on the performance of the business down the road.

BBBY Stock – Fundamental Analysis

Sales of Bed Bath & Beyond have been declining for years while the pandemic hit the company hard and it seems that the impact of this headwind might be outliving the health crisis.

Last year, BBBY reported a 17.3% drop in its sales while top-line results during the past quarter suffered a 28% decline compared to a year ago amid the impact of the supply chain crisis, which according to the management resulted in at least $100 million in lost sales.

Even though gross margins have stood relatively unchanged, operating margins remain negative. During the nine months ended on 27 November 2021, Bed Bath & Beyond produced an operating loss of $242.1 million resulting in a negative GAAP operating margin of around 4.7%.

During that same period, the company produced negative free cash flows of nearly $300 million as BBBY drastically increased its inventories to keep its stores appropriately stocked up during the current supply chain crisis.

By the end of this quarter, the company reported long-term debt of $1.18 billion on total assets of $5.66 billion including $509 million in cash.

Net sales for the 2021 fiscal year are expected to land at $7.9 billion resulting in a sizable 11% drop compared to the previous year while the firm is expecting to report adjusted earnings per share ranging from minus $0.15 to breakeven.

Based on these forecasted figures, the company is trading at around 3.8 times its 2021 sales.

Interestingly, one of Cohen’s suggestions to the Board is the possibility of spinning off buybuy BABY. Cohen believes that, as a standalone brand, this company has stronger fundamentals than Bed Bath and Beyond amid its elevated digital penetration and strong historical top-line growth.

According to Cohen, the market capitalization of buybuy BABY alone should exceed that of BBBY if it is separated from its parent company.

The odds of this happening are uncertain but Wall Street may have been enticed by the idea and most of yesterday’s uptick was possibly prompted by the fact that this scenario is now on the table.

The fact that so much of the valuation is now supported by the potential occurrence of this event, something that may or may not materialize in the future, makes BBBY a highly speculative investment and that creates room for significant negative volatility down the road if Cohen’s recommendations are ignored by the senior management.

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