The Case For Bed Bath & Beyond

I’ve always been upon the view that the market is almost 100% rational. Here’s my thought process. Ask anyone you know if they have ever made an irrational decision. In the majority of cases an individual will say they have never made an irrational decision in their entire life. Regretful decisions? Yes. But irrational? No.

In the majority of cases, individuals act in rational manners that provide either short-term or long-term benefits to themselves. The market is not irrational because individuals are not irrational beings. Irrationally is relative, not absolute. Someone’s decision making is irrational based on your values. But to them, those decisions they made during that time period were perfectly rational to them.

I bring up irrationality in the market as I have seen a lot of “experts” call the meme millennial investors “irrational” for investing in the likes of GameStop, AMC and Bed Bath & Beyond. Are these meme stock investors buying at stupid valuations that I would typically never touch? Yes. Are they irrational? No. They are not irrational because at the end of the day they don’t care about valuations and only about making a quick buck as they flip a stock at a higher price to someone more gullible than them. Irrational on a relative basis to a dye in the wool deep value investor? Absolutely.

I’ve done deep dives on most of the meme stocks. I was looking at GameStop when it was trading at $4 per share. It was undervalued. No debt. Free cash flow positive. All of their leases had less than 12 month terms. Unheard of in the retail space. Express because it was just too damn cheap and generated cash flow. AMC because I was doing a lot of due diligence on the movie theater industry. And Bed Bath & Beyond because the stock has swung from overvalued to extremely undervalued in the matter of months.

I’ve done a decent amount of work on Bed Bath & Beyond and today I will make a case for why I think the equity is undervalued. To be upfront, I am not an expert on Bed Bath & Beyond like some of the other companies I have written up. I also don’t own any Bed Bath & Beyond. But when you look at the equity compared to the actual assets and potential free cash flows, it’s not hard to make a case for why Bed Bath & Beyond is undervalued. So let’s go.

Let’s get the valuation of Bed Bath & Beyond down first. With a share price of $10.36 we have a market cap of $1 billion and an enterprise value of $1.7 billion. $1.7 billion valuation for a company that has historically generated over $10 billion in sales. $1.7 billion valuation for a company that has positive cash from operations as far as the eye can see besides the most recent quarter. Cash from operations that exceeded $1 billion for years. $1.7 billion valuation for a company with close to 1,000 locations. Replacement value? Probably over $1.7 billion.

You also have a management team that is actively seeking to monetize the hidden asset of buybuyBABY. I’ve seen figures that buybuyBABY could be worth $1 billion or more. I don’t think that is unreasonable. In 2021, buybuyBABY generated $1.4 billion in revenues with adjusted EBITDA margins in the mid-single digits with double digit revenue growth. So call it maybe $100 million per year in adjusted EBITDA and growth on top of that. It’s not hard to come to a $750 million to $1 billion valuation for buybuyBABY, which is close to the current market cap of the entire company. And the best part? Management is actively looking to monetize this asset.

I will also share a few comments regarding the update provided on the Strategy Committee. As you know, our Strategy Committee has been evaluating options for buybuy BABY. The committee is working closely with both strategic and financial advisers to properly assess the business’ inherent value potential. That work is ongoing and it is important to underscore that the Board sees significant value in buybuy BABY. It is a highly relevant banner with a strong market position and favorable demographics.

- Harriet Edelman, Interim CEO, Q1 2022 Conference Call

Q1 2022 was a tough quarter. Almost negative $400 million loss in cash from operations. Ouch. One of the worst quarters in the company’s history. But things should start to get remotely better, at least on a cash flow perspective.

In Q1 there was a large decrease in cash flows due to working capital build. Inventories are elevated at $1.7 billion. But going into Q2 and further into the back half of the year, inventories will become a source of cash as they are brought down. Management said during the recent call that in Q2 and Q3 inventory will be a good source of cash flow.

In addition, it appears as if Bed Bath & Beyond is close to securing a $400 million loan with Sixth Street Partners. If they are able to secure this loan, the liquidity runway for the company should increase and give them a better chance to monetize buybuyBABY and additional inventory to free up cash flows and secure the balance sheet for investors.

There is definitely risks with the equity. The cash flow burn may continue and the brand of Bed Bath & Beyond could very well be impaired. When retail comps turn south they tend to start declining very quickly. It happens quick and bankruptcy can come fast. As sales decrease, the model de-leverages as fixed costs of renting a store stay fixed. Merchandise margins compress and cash flows erode. That is what you saw in Q1. If the same trend continues into Q2 and beyond, Bed Bath & Beyond is a goner.

I’ve been afraid of buying Bed Bath & Beyond. I got close when the equity was under $5 per share. Real close. But I always chicken out in the end. But at the end of the day when you look at the equity valuation of Bed Bath & Beyond, if the company ever turns around it is extremely cheap.

I might nibble a bit under $10. If it goes under $5 I’ll make it a 3% position. Any good news and this stock flies. The good thing about the equity is it has been classified as a meme stock. There is a lot of interest and some big names like Ryan Cohen could get involved again. Even just for the publicity.

TLDR Thesis:

• Bed Bath & Beyond has a low valuation compared to revenues and historical profitability

• buybuyBABY is actively being shopped around and could fetch close to $1 billion in sale proceeds

• The stock is cheap enough were one bit of good news will shoot the equity to the sky

• The company is a meme stock and could meme towards the moon, again

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