Is It Too Late To Short Bed Bath & Beyond?

By Unknown Thursday, December 17, 2015

Bed Bath and Beyond is down 30% from its early 2015 highs of $80. The company has posted weaker than expected growth figures and the stock has been punished accordingly. The home furnishings company set lofty expectations for investors after a stellar 2013, but given the current promotional retail environment, Amazon's rapid rise, and low customer switching costs, Bed Bath and Beyond doesn't look like it will reclaim its 2013 growth figures anytime soon.

YoY sales growth has slowed, from a high of 14.9% in 2013, to 3.3% in 2015. Gross margins are beginning to contract. Same Store Sales (SSS) continue to decline and are down 20% since 2013. The divergence between Sector SSS and Bed Bath and Beyond SSS is getting wider.

Bed Bath and Beyond is trading at a Forward P/E of 9.77, which is well below the S&P 500 multiple and its peers. This low multiple presents a trap for value investors. While the stock may look cheap, there is good reason for the low multiple, and it can go lower. Bed Bath and Beyond can no longer price at a premium thanks to Amazon, which will result in continued pressure on long-term margins.

With more than 1,000 retail stores in the U.S., the store concept is saturated and the company will have to depend on international growth and expansion to support further upside to sales growth and improve margins. The risks associated with international expansion are many and execution is key.

Building out other store concepts (buybuy Baby, Cost Plus) is another strategy management can utilize to improve its earnings.

Given the negative fundamental backdrop and deteriorating technicals, it is not too late to short Bed Bath and Beyond.

Short term, the stock is in a clearly defined down channel and broke key support at $57. All moving averages are falling. The 50 day MA at $56.50 may act as a magnet for the stock, and would be an opportune level to initiate a short position with a stop set at $57.50. There is no bottom in sight.

Long term, the stock has broken below the neckline of a bearish head and shoulders formation that has been in the making for three years. The long term trend line dating back to the 2009 financial crisis has broke, and a death cross is imminent on the weekly time frame. A measured move of the head and shoulders pattern points to a $40 price target.

Given the weak technicals, both on a short and long term basis, and deteriorating fundamentals at the company level, Bed Bath and Beyond looks like a prime short candidate. The stock may experience an oversold bounce up to its 50 Day Moving Average near $56.50, providing an appealing entry point. With a stop loss set at $57.50, and a $40 price target, you are risking $1.00 to make $16.50, representing an attractive risk/reward profile.

Risks associated with this short thesis include an aggressive capital allocation plan enacted by management (share buybacks, dividend initiation), strong international expansion and/or successful rollout of Cost Plus stores, stronger e-commerce growth to better fend off Amazon competition.
The Wall Street Fox

The Wall Street Fox utilizes fundamental and technical analysis to generate investment ideas. TWSF holds a MBA, and is currently preparing for the Chartered Market Technician (CMT) designation.

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