In light of Bed Bath & Beyond (BBBY, Financial) filing for Chapter 11 bankruptcy protection, GuruFocus’ Warning Signs, a Premium feature, guides its users in how to avoid falling into value traps by looking at potential red flags about the company’s financial strength and profitability.
According to the Warning Signs feature, Bed Bath & Beyond had several warning signs, which include a low Piotroski F-score of 2 out of 9, declining gross profit margins and declining revenues over the past five years.
Stock drops below $1 as company files for bankruptcy protection
On Sunday, the Union, New Jersey-based home furnishings retailer filed for bankruptcy protection following failed attempts to raise enough cash to meet its debt obligations.
During the proceedings, the company’s 360 Bed Bath & Beyond and 120 buybuy BABY stores will remain open while the company starts closing retail locations and liquidating its assets. The company also motioned in a bankruptcy court seeking approval to auction its retail brands.
On Monday, shares of Bed Bath & Beyond closed at 18 cents, down approximately 38.30% from the previous close of 29 cents and 99.40% from the 52-week high of $30. GuruFocus’ GF Value Line labeled the company a possible value trap based on its low price-to-GF Value ratio of 0.02.
Warning signs of financial distress were present
GuruFocus’ Warning Signs feature listed several warning signs for Bed Bath & Beyond, including low financial strength, low Piotroski F-score and declining revenue and gross profit margins.
Bed Bath & Beyond has a GF Score of 53 out of 100 based on a profitability rank of 6 out of 10, a financial strength rank of 4 out of 10, a momentum rank of 1 out of 10 and a rank of 2 out of 10 for growth and GF Value.
Bed Bath & Beyond’s financial strength ranks just 4 out of 10 on the back of cash-to-debt ratios underperforming approximately 93% of global competitors.
Company had declining revenue and gross profit margins
Although the company’s profitability ranks 6 out of 10, Bed Bath & Beyond’s gross profit margin has declined by approximately 3.1% per year on average over the past five years and is underperforming approximately 71% of global competitors.
Additionally, the company’s net profit margin and return on assets underperform over 89% of global competitors.
Bed Bath & Beyond said on March 30 that preliminary net sales for the quarter ending Feb. 25 were $1.2 billion, with comparable sales declining between 40% and 50% year over year. The company also warned that it continued having operating losses and that it had modest free cash flow usage.
For the quarter ending November 2022, Bed Bath & Beyond reported net sales of $1.25 billion, down approximately 33% from the prior-year quarter on the back of lower-than-expected in-stock presentation of the company’s assortments. Net sales for the nine months ending November 2022 were $4.16 billion, down approximately 28.5% from revenue for the nine months ending November 2021.
The company’s three-year revenue decline rate of 4% underperforms approximately 68% of global competitors.
Bed Bath & Beyond reported net loss of $393 million, or approximately $4.33 per diluted share, compared with a net loss of $274.6 million, or approximately $2.78 per diluted share, from the November 2021 quarter. The company reported $980.6 million in costs of goods sold and $583.2 million in total operating expenses.
The company’s growth ranks just 2 out of 10 on the back of three-year earnings and book value growth rates that are underperforming more than 94% of global competitors.
Company has a low Piotroski F-score
Joseph Piotroski developed nine criteria for finding good low price-book stocks:
- Positive return on assets.
- Positive cash flow return on assets.
- Increasing return on assets compared to previous year.
- Higher cash flow returns on assets compared to returns on assets.
- Lower leverage compared to previous year.
- Higher current ratio compared to previous year.
- Lower shares outstanding compared to previous year.
- Higher gross margin compared to previous year.
- Higher asset turnover compared to previous year.
Based on his research, Piotroski found out that investing in stocks with an F-score of at least 8 out of 9 outperformed the Standard & Poor’s 500 index by approximately 13.4% during the period from 1976 to 1996. According to the research, companies with an F-score of at least 7 out of 9 usually have good business operations while companies with an F-score of 3 out of 9 or less usually have poor business operations. As of November 2022, bed Bath & Beyond’s Piotroski F-score is a low 2 out of 9.
Bed Bath & Beyond had negative return on assets and cash flow from operations during the November 2022 quarter and thus, failed the first two criteria on the list. Additionally, the company’s return on assets during November 2022 was more negative than return on assets during November 2021.
The long-term debt to total asset ratio increased from November 2021 to November 2022, showing the company was becoming more dependent on debt to grow its business.
Additionally, Bed Bath & Beyond’s current ratio has declined over the past 10 years.
The company met just two out of the nine criteria: higher cash flow returns on assets compared to returns on assets and lower shares outstanding in November 2022 compared to November 2021.
