Is Bed Bath & Beyond Defying the Retail Odds?

Bed Bath & Beyond (NASDAQ: BBBY) is bucking a lot of trends these days. It’s a discounter with an urban clientele and a big box that’s doing sort of well.

The thing that stands out most about Bed, Bath & Beyond are its’ revenues. They’ve actually been increasing in a very difficult retail environment. BBBY reported revenues of $12.1 billion in February 2016 that grew to $12.22 billion in February 2017. That’s an accomplishment in a market where similar brands like JC Penny (NYSE: JCP) and Target (NYSE: TGT) are struggling with falling revenues.

Bed Bath & Beyond has More Problems than You Think

Yet all is far from well at Bed, Bath & Beyond, it reported a net income of just $685.11 million and a free cash flow of $201.96 million on February 28, 2017. Those numbers indicate a very low operating margin.

Even more troubling is the apparent lack of float at Bed, Bath and Beyond; it reported assets of just $6.856 billion and cash and short term investments of $488.33 million. That was in spite of generating $1.042 billion in cash from operations during the last quarter of 2017.

Another potential problem at Bed, Bath & Beyond is a low market cap ($5.583 billion on April 13, 2017) and enterprise value ($6.629 billion). That gives the company little leverage and leaves it very vulnerable to the death spiral.

Is Bed, Bath & Beyond Amazon Proof?

The death spiral occurs when a retailer simply cannot generate cash to cover its operating expenses. Discounters are very vulnerable to the death spiral because they operate at such low margins.

Unlike Penny’s and Target, BBBY seems to be holding its own against Amazon (NASDAQ: AMZN) but that situation is rather deceptive. Bed, Bath & Beyond is in a precarious situation because it is staving off Amazon with deep-discounting in the form of the famous coupons.

The danger BB&B faces is that Amazon sells all the same stuff it offers at lower prices with the ultimate in convenient shopping click a mouse vs. pushing a cart around. The only way Bed, Bath & Beyond can remain competitive against Amazon is to offer really deep discounts. That creates lower margins and makes the death spiral more likely.

It also traps Bed, Bath & Beyond because the chain cannot afford to raise prices even if it cannot cover costs. This is the same trap that dollar stores like Big Lots (NYSE: BIG) and Dollar General (NYSE: DG) find themselves in. These stores have to constantly cut prices just to keep customers coming in the door.

Bed, Bath & Beyond might be in a slightly worse situation because it relies on a more middle-class and urban clientele. That means its customers are Amazon’s core demographic. If it were to raise prices, BB&B might find itself in Target’s predicament with steadily declining revenues and falling sales.

The Real Estate Dilemma

Another problem that stores like Bed, Bath & Beyond face is retail real estate. A number of analysts and Washington Post Morning Mix writer Travis M. Andrews have pointed out that “America is over stored.”

That means the amount of retail space in the market exceeds the demand. This can be good for discounters and other low end retailers in the short-term but bad in the long term.

The immediate benefit for discounters is that they can demand and get lower rents or leases. The long-range problem is that landlords will try to make up the difference by neglecting maintenance. This leads to problems like leaky roofs, defective wiring, doors that don’t work, outside lighting that goes dark, parking lots that are full of potholes, outdated floorplans, and faulty plumbing.

Such crumbling infrastructure drives away customers and diminishes parking value. It also creates problems at BB&B which often fills empty department store spaces.

The Danger from Retail Decay

A related problem is malls and shopping centers full of empty spaces which can also drive away customers. Stores like Bed, Bath & Beyond rely heavily upon spur of the moment shoppers who might dart in while visiting another store such as Walmart. Where is that foot traffic supposed to come from in a mall or center full of empty stores?

Empty stores add to decaying infrastructure because a shopping center might hit a point where it lacks enough paying tenants to cover the operational costs. That means the owner has to turn off the outdoor lights, and stop fixing the parking lot. Security guards might be let go, which will make the center more attractive to the homeless or scary individuals.

That decay is even more likely to drive away the middle customers that chains like Bed, Bath & Beyond rely upon. Soccer moms will be less likely to pull into a parking lot full of potholes that has a couple of drug dealers hanging around.

The last thing any retailer wants is to give customers another reason to shop at Amazon. That is exactly what will happen as retail decay grows worse.

Bed, Bath & Beyond has No Future

This retail decay means that Bed, Bath & Beyond is a lousy long-term investment because it is only a matter of time before this chain starts to decline like Target and JC Penney are.

Therefore investors should not be fooled by the 15¢ dividend that BBBY has scheduled for June 14. There’s no way that pay can be sustained, it is just a ploy to sell stock and buy some breathing room.

My take is that BB&B will see declining revenues within the year or sooner. When it does its share values will fall and talk of the death spiral will begin. Stay away from Bed, Bath & Beyond folks because its 15¢ a share dividend may soon be a thing of the past, along with the 20% off coupons in your mail box.