Summary
- Bed Bath & Beyond's continued P&L declines are distracting investors from the massive value to be unlocked on the balance sheet.
- I believe BBBY's non-core assets are worth significantly more than what the market is currently assigning.
- Given the elevated short interest, further asset sales or positive news flow could send shares much higher from here.
As its 4Q19 results made clear, Bed Bath & Beyond (BBBY) is in secular decline. The path to limiting further profit declines will certainly be long, but there is a silver lining for investors, in my view. At current valuations, I believe the market is grossly underestimating BBBY's underlying asset value (both non-core assets and excess inventory), which could be worth ~$1.4bn on conservative assumptions. With BBBY's asset value far exceeding the company's current enterprise value, I believe BBBY represents deep value at these levels, with investors getting the assets at a highly discounted price and a free call option on a fundamental turnaround. With the short interest at ~57% of the float, any semblance of positive news flow (or the lack of negative news) could drive BBBY shares much higher.
4Q19 Declines As Expected
BBBY posted 4Q19 numbers that were largely in-line with Street pessimism - recall that management had outlined preliminary numbers in mid-February, which largely reflected the ongoing decline in store traffic, as well as the margin weakness on elevated promotional activity. As the fiscal quarter goes up to February, however, 4Q numbers did not reflect the impact of COVID-19. Per management, consolidated net sales in March saw steep declines, falling 31% YoY (-41% YoY in stores). On a quarter-to-date basis, sales into mid-April declined 42% YoY, with in-store weakness offset by digital sales growth of +35% YoY. A brief summary of the P&L is as follows:
Source: BBBY 4Q19 Presentation
Ample Liquidity To Ride Out COVID
The more interesting part of the call, in my view, was the positive commentary surrounding the state of BBBY's liquidity position. Per management, BBBY can immediately reduce its weekly cash burn by >40% from expense management initiatives, though there is potential for further upside.
I mean to kind of lean into a little bit more, Curt, I would tell you that while we've been still working on the exit towards furlough and the negotiations, we're immediately able to cap off more than 40% of our weekly cash burn rate immediately. And we're implementing further plans through based on what Robyn and I shared. - 4Q19 Transcript
It also appears that there is wiggle room here if needed, with management citing additional levers such as further rent and vendor negotiations, as well as the monetization of non-core assets and inventory. The latter looks to be within reach as the company is now about halfway through its efforts towards a $1bn inventory reduction at retail, driving a ~16% YoY decline in inventory balances exiting FY19. Management plans to work down the remaining inventory as planned, with no interruption thus far, despite the COVID-19 outbreak. That said, this needs to be balanced with the capex requirements needed to capture the shift to online and Buy Online, Pick-up In-Store (BOPIS).
