Dismal Outlook for Bed Bath, Slicing Fair Value Estimate

Shares of no-moat Bed Bath and Beyond plunged Wednesday after the firm’s second-quarter results continue to relay the competitive state of retailing, with the company struggling to move back into positive same-store sales generation.

While we anticipated weakness in same-store sales performance, projecting a quarter with around 1% same-store declines, the magnitude of the actual slowdown was wider than we anticipated, with same store sales contracting 2.6%. And while the company’s e-commerce continues to grow at a more than 20% clip, we don’t think it’s meaningful enough to protect the firm from total market share erosion considering current brick-and-mortar prognosis.

We have incorporated persistent pressure ahead, as we think any positive strategic changes will be competed away by pricing pressures--leading to margins that remain compressed over our forecast. As such, our long-term forecast includes negative same-store sales declines and operating margins below 7%, similar to the level that is likely to be generated in the current fiscal year.

Accordingly, we plan to adjust downward our $35 fair value estimate by about 20%.