Final Trade Detail
- Bed Bath & Beyond has seen gross margins decline for 26 consecutive quarters.
- BBBY's has conditioned its customers to be addicted to coupons. Without coupons, customers won't show loyalty.
- BBBY is undergoing a turnaround story with its "next-gen" stores. Investors pushed up the shares too far to fast. We think this "turnaround" will take much longer to realize than most people think. Loop Capital Analyst Anthony Chukumba agrees with us and thinks their fiscal 2019 guidance is "unrealistic."
It’s time to short Bed, Bath & Beyond (Nasdaq: BBBY).
It’s one of our “Stocks That Are Guaranteed To Lose You Money Long Term” – just like Blue Apron (APRN).
We’ve been waiting for a chance to short the stock. And now we have it.
You see, the market has been in a “V-Up” recovery since its bottom this past December.
Blue Apron rose more than 125% on horrible earnings and a partnership with Weight Watchers – which we think is doomed to fail.
It then proceeded to fall by 33.3% from its February peak. MightyTrades readers made 29% in two weeks on the drop.
This time, it’s Bed Bath & Beyond’s turn.
BBBY is up 57% since its December lows for no reason.
It reported Q3 earnings on January 9th. Investors loved the quarter and pushed up shares 17% the next day. We’re not sure why.
The company’s revenues were flat year-over-year (yr/yr) at $3 billion for the quarter.
BBBY’s gross profits were $1 billion for the quarter… not bad until you realize that Sales, General, and Administrative (SG&A) costs eat all of that up. That means management is paying itself all the gross profits after it uses coupons to entice customers to come in the stores.
(It’s always been this way. Things haven’t improved in years. It’s why shares are down almost 80% since 2013 – during one of the biggest bull markets ever.)
BBBY earned just $209 million in operating profit on $8 billion in sales (for the nine months ending December 1, 2018). Net earnings came out to $117 million after taxes and interest expenses.
Seems like a lot of work to only make $117 million in earnings on $8 billion in sales. But wait, there’s more. BBBY spent $256 million in capital expenditures. Meaning BBBY lost money and left none for shareholders. BBBY paid dividends, yes… but not from its earnings. It needed to dip into its cash balance to pay for it.
It’s not a recipe for solid investing in our opinion.
Revenues were flat year-over-year. And earnings per share were down 50%.
Our thesis isn’t too hard to understand.
Bed, Bath, and Beyond has great items. It’s a solid brand. But it’s conditioned consumers to expect coupons.
Grant and I received coupons every day for the past few years. Multiple. We’ve been to the stores. All of them get accepted even if their expiration dates passed months prior.
BBBY tried to reduce the number of coupons it gives out. But you know what happened? People stopped shopping there.
And the market has rewarded it by sending its shares up 57%.
We’ll take the other side of the bet.
Recommendation: Short shares of Bed Bath and Beyond (BBBY) down to $16.
Our first target price is $15 – about 10% lower. We think shares could drop to $13 – about 22% lower. But we’ll set $15 as our first price target.
(Position Sizing: Be sure to put no more 1-2% of your portfolio into this short. Our stop loss will be $20).