Retail Carnage


I woke up this morning to see news that Bed Bath & Beyond (“BBBY”) was down 25% pre-market. The market capitalization of Bed Bath & Beyond has always been out of my batting range so I never covered the stock. But given the reaction the market had to its stock I took instant interest.

More importantly, I am heavy in retail names and the guidance Bed Bath & Beyond gave was a little discomforting. Taken directly from their press release:

  • The retailer said traffic slowed significantly during the key month of August and therefore sales did not materialize as anticipated.

  • "As COVID-19 fears re-emerged amid the on-going Delta variant, we experienced a challenging environment. This was particularly evident in large, key states such as Florida, Texas and California, which represent a substantial portion of our sales," notes Bed Bath & Beyond CEO Mark Tritton.

  • Tritton also pointed to unprecedented supply chain challenges and steeper cost inflation during the quarter.

There are a few things to take note. First, significantly slowing traffic for the month of August is not good for anyone who owns retail stocks. Most retailers have reported earnings already and did not have the month of August in their results. Bed Bath & Beyond is an outlier with their fiscal year so it was one of the only retailers where we got to see what August results are.

In addition on the earnings call the management team stated that traffic continued to stay slow through the month of September, blaming it directly on the Delta variant.

Given the pre-market trading of Bed Bath & Beyond (down over 25%) I was expecting the stock to selloff hard. But when I saw what happened to every other retailer (most down double digits) I decided to get some research done and form my own independent thought on what is going on.

First, I think Bed Bath & Beyond is an outlier for most retail companies. Bed Bath & Beyond was a prime beneficiary during COVID-19. Comparable sales in Q2 2020 were up 6%, the first time there was a positive comp since 2016. Comparable sales continued to increase every quarter since Q2 2020, until now. The reason? People were stuck at home and wanted to buy nice things. This was seen is almost every furniture and home goods company where sales reached all time highs.

Secondly, I sincerely believe the management team at Bed Bath & Beyond is using COVID and the supply chain issue as an easy out. In fact, I think Bed Bath & Beyond is back to facing the same problems they were prior to COVID-19 and they are using this easy way out to camouflage the true issues the business model is facing.

What is even more interesting was that August retail sales killed it and surprised most analysts.

The Census Bureau said on Sep 16 that retail sales jumped 0.7% month over month in August, surprising analysts’ prediction of a 0.8% decline. On a year-over-year basis, retail sales increased 15.1% in August. The jump in August comes despite a decline in auto sales, as semiconductor shortage continues to hurt the production of new vehicles.

Sure, store traffic probably did decline for Bed Bath & Beyond. But it’s probably not due to COVID cases picking up. Because back in Q2 2020 COVID cases were much higher then as they are now and comps are down 1%. The decline in comps is most likely due to individuals getting out of their house again and a slowdown in home good purchases.

I am heavily invested in a few retail companies and used the retail carnage to increase my positions. If you are a subscriber you can see my research reports below:

These two companies sell clothing which is a different animal than what Bed Bath & Beyond sells. But given the “retail” distinction sometimes Wall Street will punish an entire industry out of “gut” reaction.

From the research I have done on both of these companies they are trading significantly below fair value with material upside. Both have recently posted great earnings in the 1H of 2021 and will likely continue to outperform going into the back half. The balance sheets are strong. And a material amount of cost has been removed from the operating structure. So any increase in sales will result in massive operating leverage.

I don’t really cares what happens over the next quarter or two as I think both companies are trading significantly below their fair value and will generate strong free cash flow. So given the materially weakness today in the entire retail industry I have been a buyer. Should prices continue to fall I will continue to average down.

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