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10 Reasons to Avoid Bed Bath & Beyond Stock

Motley Fool - Tue Sep 13, 9:07AM CDT

Bed Bath & Beyond(NASDAQ: BBBY) has loomed large in the news with the firing of its CEO in late June, the introduction of a sweeping restructuring plan, and the death of its CFO in early September. A short squeeze also turned it into a "meme stock" and a hot topic among retail investors.

But the problems didn't start recently. Bed Bath & Beyond has been a fundamentally weak investment for many years now, and I believe investors should still avoid Bed Bath & Beyond's stock for ten simple reasons.

A child draws

Image source: Getty Images.

1. Its sales are declining

Bed Bath & Beyond's comparable store sales declined in fiscal 2016, 2017, 2018, and 2019. It stopped disclosing its full-year comps in fiscal 2020 and 2021 due to the pandemic, but its net sales still fell sharply in both years. As of the first quarter of fiscal 2022, its comps have already fallen for four consecutive quarters. Analysts expect its annual revenue to continue declining for the foreseeable future.

2. Its inventories are rising

As its sales growth stalls out, its inventory levels are rising. The company ended the first quarter of 2022 with $1.76 billion in merchandise inventories, representing 13% growth from a year earlier. During that same period, net sales fell 25% year over year to $1.46 billion.

3. Its margins are shrinking

If a retailer's inventories are rising faster than its revenue, it needs to use markdowns to clear out its excess inventories. Unfortunately, Bed Bath & Beyond has already marked down its merchandise for years without meaningfully boosting its sales.

Between fiscal 2015 (the final year it posted positive comps growth) and fiscal 2021, its gross margin declined from 38.1% to 31.5%. It has shrunk still further to 23.9% in the first quarter of 2022, and that contraction will likely continue as the company grapples with inflationary and supply chain headwinds.

4. It's deeply unprofitable

Bed Bath & Beyond hasn't generated a full-year GAAP (generally accepted accounting principles) profit since fiscal 2017, and analysts expect it to stay in the red for the foreseeable future.

Those losses persisted even as it shuttered its weaker stores and divested its non-core banners over the past few years. It also recently announced that it would lay off about 20% of its staff, close 150 weaker stores, and eliminate a third of its owned brands to further rein in its spending -- but those efforts won't guarantee its survival.

5. It's running out of cash

Bed Bath & Beyond ended the first quarter of 2022 with just $107.5 million in cash and equivalents, compared to $1.1 billion a year earlier. Therefore, it needs to focus on cutting costs and conserving cash -- which should prevent it from making any meaningful investments in expanding its e-commerce ecosystem or renovating its brick-and-mortar stores.

6. It's shouldering a lot of debt

Bed Bath & Beyond still had about $0.9 billion in total liquidity after factoring in its revolving credit facility, but that's a dire situation for a company that is still shouldering $1.38 billion in long-term debt and burning cash every quarter.

It recently secured $500 million in fresh financing, which might enable it to tread water for a few more quarters, but that cash won't last long if the company doesn't quickly implement some aggressive turnaround strategies.

7. It wants to sell more shares

To raise more cash, the company plans to sell up to 12 million shares of its common stock, which would increase its outstanding share count by about 15%. It may be hoping to capitalize on its reputation as a meme stock to sell more shares -- as GameStop and AMC previously did -- but the market's reaction to that announcement has been tepid so far.

8. It still needs a permanent CEO

To patch up its sinking ship, Bed Bath & Beyond needs a visionary captain. Yet it just fired its CEO, Mark Tritton, who was hired as its turnaround leader in 2019, following a dismal first-quarter report. Sue Gove, an independent director on the board, is currently filling his shoes as the retailer's interim CEO, but it's still actively looking for a permanent CEO.

9. Its insiders are cashing out

Gove initially attracted a lot of attention by buying 50,000 shares of Bed Bath & Beyond on July 1 at an average price of $4.61, which nearly doubled her stake in the company. Yet, other insiders aren't following her lead. Over the past three months, they sold nearly 10 times as many shares as they bought. Activist investor Ryan Cohen, who had been one of Bed Bath & Beyond's biggest bulls, also liquidated his entire position last month.

10. It doesn't have a moat

Lastly, Bed Bath & Beyond still doesn't have any competitive advantages. Its sales tumbled in recent years because it couldn't keep pace with larger retailers like Amazon, Target, Walmart, and IKEA -- and its brand will likely continue to fade away as it closes its stores and marks down merchandise. It might be far too late to keep that moat from shrinking. It held out for a bit longer than many of its peers, but it could suffer the same fate as Sears and J.C. Penney.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Target, and Walmart Inc. The Motley Fool has a disclosure policy.

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