EUR 850.00 For Business Accounts Only

Morningstar | Competitive Pressures Fail to Abate, Making Margin Gains Increasingly Uncertain at Bed Bath & Beyond

Over time, we have seen some retailers pivot to defend their positions and others persistently cede share. No-moat Bed Bath & Beyond falls squarely into the latter category, failing to adapt to evolving consumer preferences or differentiate its product offerings. Its sales have risen just 2.5% on average and operating margin has compressed nearly 900 basis points to 6% (in 2017) over the past five years. We recently reassessed our assumptions for Bed Bath, lowering our fair value estimate to $9.40 per share from $15.20, as we now believe the long-term trajectory is worse than we expected. With terminal outcomes that could include bankruptcy at some point, steady-state performance declines, and turnaround metrics considered, we don't think there is significant value to be unlocked, given the firm's current strategic direction.

Experiences across the retail landscape over the past decade have offered investors the ability to study economic and consumer behaviors that have led to the dissolution of numerous physical retailers, including peer Linens 'n Things, specialty stores like Toys 'R' Us and Circuit City, and the ongoing near-death experiences of J.C. Penney and Sears, as seen in the continued spiral of their stock prices and Sears' filing for reorganization. Using these companies as proxies, and considering all potential outcomes, the prognosis for Bed Bath isn’t good. Despite our opinion that bankruptcy is not imminent, we don’t think the possibility for shares to take a similar path to retailers such as J.C. Penney or Sears is a promising road for investors to pursue, and we believe shareholders would need a wider margin of safety to compel share ownership. For investors seeking exposure to the home improvement and furnishing space, we'd recommend Williams-Sonoma shares, which trade at a 27% discount to our $70 fair value estimate.

For further information regarding our reassessment of Bed Bath & Beyond, please refer to our report "Profits at Bed Bath Hampered as Customer Traffic Moves Beyond."