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Bed Bath & Beyond Loses Traction in Turnaround Plan

We view the shares as undervalued, although we caution investors that the stock could intermittently come under pressure.

We don’t plan any material change to our $23.50 fair value estimate for no-moat Bed Bath & Beyond after incorporating third-quarter results into our model. While recent results knocked a few dollars off our intrinsic value, the reduction of our long-term tax rate forecast to 23% (from 27%) offset the downside. Quantitative proof of progress in the company’s turnaround largely escaped the period, with comparable sales falling 7% (and the namesake business down 10%), deleverage of selling, general, and administrative costs (by 320 basis points to 37%), and an adjusted EPS loss of $0.25 (versus guidance of $0.00-$0.05). A bright spot was the gross margin, which expanded 50 basis points to 35.9% and 360 basis points over 2019, helped by pricing and mix. The firm offered a weaker-than-expected full-year outlook for $7.9 billion in sales (from $8.1 billion-$8.3 billion prior) and EPS of negative $0.15-$0 (from $0.70-$1.10).

We view the shares as currently undervalued, although we caution investors that the stock could intermittently come under pressure over the next few quarters, given a tight labor market, ongoing supply chain issues, and near-term costs to apply cost-cutting measures. However, longer term, we contend that upside to profitability still exists, largely from higher uptake of private-label products, supply chain improvements, and further cost-cutting (with the company announcing $100 million incremental savings to be pursued via store optimization, discretionary savings, and lower fixed costs). In our opinion, these efforts should support our tepid decadelong forecast, which includes sales growth of 1%-2% and an operating margin that returns to above 5%. Our model fails to reach the company’s 2023 goals of a 38% gross margin and EBITDA of $850 million-$1 billion, given the competitive landscape and difficult comparisons in the category ahead. We forecast a muted 35% gross margin and roughly $530 million in EBITDA in 2023.

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