We are always on the lookout for bargains. But while
Bed Bath & Beyond
Stores can offer some good, the stock does not look like a bargain after rising high after the appointment of a new CEO.
It's not that Bed Bath & Beyond (BBBY) made a bad choice. Last Thursday, it announced it
(TGT) chief merchandising officer, Mark Tritton, would take the helm. Hiring someone with Tritton's expertise to oversee a turnaround is very good news. If nothing else, he has the skills to fix one of the chain's biggest problems – the lack of distinctive products. Jefferies analyst Jonathan Matuszewski calls the range "commoditized" and suggests that Tritton's background in private label merchandise can go a long way in remedying it.
The stock rose 31% to $ 12.98 in the two days following the announcement from Tritton – up 75% since low August. That climb apparently started out of nowhere. It started before reports, perhaps spurred by an activist's involvement, that Goldman Sachs had been hired to lead an auction of some of the non-short-term entities. And it began before a series of upgrades from analysts bullish about the possibilities if Bed Bath & Beyond finally hired a new CEO. It's a long way to say that the news can actually be reflected in the stock price.
Now comes the difficult part.
Jefferies & # 39; Matuszewski left his rating on the stock on Neutral, citing "the risk inherent in an early phase transformation without significant bending in basic things yet." He is right in that. Sales of the same store have fallen by more than 6% over the past two quarters, while revenue is expected to decline by 5.7% to $ 11.35 billion in fiscal year 2020.
Then that's the question of pricing. For Bed Bath & Beyond to compete online with such
(AMZN), it must lower prices. And that's exactly what it has done, according to Loop Capital analyst Anthony Chukumba. He compared prices for 50 items and found that Bed Bath & Beyond's was 8.6% higher than Amazon's, although cheaper if buyers use one of the chain's 20% off coupons. That makes Bed Bath & Beyond more competitive, but probably not good for the stock, Chukumba writes. "Although we usually see more competitive prices as a positive … we believe this will put pressure on BBBY's gross margin," he explains.
But the biggest reason for caution is that Bed Bath & Beyond is not Target. Wells Fargo analyst Zachary Fadem argues that buyers go to the two stores for different reasons, and that Target never had Bed Bath & Beyond & # 39; s problems with store traffic. Throw in potential margin problems that may come with more competitive prices and larger online sales, and the stock looks like it may have come before itself.
"With Bed Bath & Beyond shares up about 20% after the announcement, we see the market place the carriage in front of the horse," writes Fadem. Although he raised his price target to $ 10, from $ 9, following Tritton's appointment, Fadem reiterated its underperform rating on the stock.
Sure, the shares of Bed Bath & Beyond are still cheap. They now trade 6.8 times 12 months of future earnings, up from 3.9 times in August. We're just not sure it's cheap enough.
Write to Ben Levisohn at Ben.Levisohn@barrons.com