Lowering No-Moat Bed Bath & Beyond Fair Value Estimate
We now project a sales decline of 6%.
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.
Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.