Shares of Bed Bath & Beyond (BBBY) dropped in morning trading after an analyst downgraded the stock to his firm’s equivalent of a Sell rating, citing concerns over the growth and margin outlook relative to peers.
ANALYST TURNS BEARISH: JPMorgan analyst Christopher Horvers downgraded Bed Bath & Beyond to Underweight, his firm’s equivalent of a Sell rating, and cut his price target for the shares to $18 from $21. In a note to clients titled “If you can’t comp positively now…”, Horvers noted that the stock has run up 16% since the House passed the tax bill in November, and recent estimate revisions suggest the Street is assuming 50% flow through of tax savings. He believes this could prove “aggressive” considering the increased competition in the home furnishings space and Bed Bath & Beyond’s need to invest in advertising, price and infrastructure. Horvers doesn’t see a turn “in sight” for the company’s comps given that the retailer was unable to post positive same-store sales during the critical holiday season despite a “robust” consumer backdrop. Bed Bath & Beyond posted a 0.3% decline in SSS last quarter despite including November, “which was arguably the best month of the year for retailers.” Additionally, the analyst noted that his work indicates that trends have slowed sequentially quarter-to-date, in contrast to a string of positive pre-announcements from retailers. He sees margin pressure getting worse before getting better and believes that sales may take longer to rebound.
COMPETITORS: Bed Bath & Beyond competes with offerings from Amazon (AMZN) and Target (TGT), as well as companies including Kohl’s (KSS), Overstock (OSTK) and Wayfair (W). Earlier this month, Loop Capital said Amazon has become “more aggressive” in its pricing strategy, and that in a study across a basket of 50 items for both companies, Bed Bath & Beyond prices were on average 19.8% more expensive than Amazon. Target recently said that its comparable sales in the combined November/December period grew 3.4%, which was better than the company previously said that it expected, and Target raised its FY17 earnings view. Kohl’s, meanwhile, said that its total and comparable sales for the November and December combined period were up 6.9% over last year. Kohl’s Chief Executive Officer Kevin Mansell noted that “All lines of business and all regions reported positive comp sales” for the critical holiday period. In December, Bed Bath & Beyond beat analysts’ estimates on the top and bottom line and backed its FY17 adjusted EPS view. The company forecast FY17 revenue flat to slightly positive and SSS down in the low single-digit percentage range.
