Bed Bath & Beyond: Stock Price Tied To Order Fulfillment Process (NASDAQ:BBBY)

Thesis

Bed Bath & Beyond (BBBY) is betting on its proactive management of digital delivery services to improve the ROI. In this article, I hope to underscore the growth aspect of the order fulfillment process by the company’s management indicative of a strong future revenue outlook and a lower risk for investors.

In the Q2 2020 filings, BBBY announced that it had grown its digital channels by 89%. This move was in line with the desire to drive strategic growth plans that would see the company prioritize spending on essential capital expenditures. The stock is currently 66.85% off the 5-year high when it stood at $57.66 on October 2015.

Bed Bath & Beyond could see higher customer growth as well as an increase in new customers especially as it seeks to revamp its Buy-Online-Pick-Up-In-Store (BOPIS) and contactless Curbside Pickup services. The ease provided by these two new digital services saw the retailer add 2 million customers in the second quarter. Inclusive of this was 800,000 customers that are new to BBBY.

The transformation of the business plan into a digital-first enterprise is expected to improve service delivery into 2025. Digital sales as at the end of the second quarter represented a third (32%) of total sales, with BOPIS and curbside pickup taking 15%. The financial health of BBBY is currently stable, as gross profit rose to 36.74% up from 26.73% recorded in August 2019, while the cost of revenue decreased to 63.26% from an upside of 73.27% over the same period, indicating heightened sales against costs.

Since 2018, the cost of goods sold by the company has been declining, indicative of increased sales and profit margins.

3-year analysis of the price against cost of goods sold

In the 3-year analysis, cost of goods sold by BBBY has decreased by 103.4% against a subsequent increase in stock price. Owing to the decrease in cost of goods as well as cost of revenue in the digital transformation, it is expected that the company will close approximately 200 BBBY stores by 2022 that will see it accumulate $100 million in annual savings. This saving plan is expected to spruce up the omni-fulfillment capabilities.

Shipt Partnership

The recent announcement of the partnership between BBBY and Shipt – a membership-based delivery platform owned by Target (TGT) is a major milestone that is expected to increase the retailer’s market share. Shipt will facilitate same-day delivery services to customers that either buy products through it or BBBY’s digital channels as long as they indicate the preferred delivery service. The CEO, Mark Tritton, joined BBBY from Target in November 2019, so he will try to replicate the success factors from his previous employer.

Target acquired Shipt in December 2017 at a cost of $550 million. Since then, the company’s stock has risen by more than 158%, from $61.02 to $158.00, as at October 6, 2020. The corporation’s market cap has also increased from $30 billion to $80 billion (a 150% growth) due to improved order fulfillment practices.

While Target’s customers are charged a flat fee of $9.99 per order to unlock Shipt’s same-day delivery service, BBBY’s customers will be required to pay a flat-rate fee of $4.99 for orders above $39. Customers with an annual Shipt membership will access free same-day delivery service for orders above $35. This will be a small price to pay considering the fact that more customers in the wake of the coronavirus pandemic prefer digital shopping as opposed to brick-and-mortar physical access.

Additionally, Target’s revenue in the second quarter rose to $83 billion with same day pick-up sales up 273% over the period. This increase represented 6% of the total comparable growth in sales. At the end of September 2020, Target announced its plan to hire 130,000 associates to drive up pick-up orders. The company anticipates higher pickup requirements into 2022. By July 2020, Target’s digital channels had recorded more than 10 million new customer visits and a quadrupling of fulfillment orders.

Financial and Risk Position

Bed Bath & Beyond opens the third quarter with a net income of $217.9 million, up from a net loss of $138.8 million YoY.

Cash from investing as well as from operations amounted to $780.8 million, bringing a total cash position of $1.44 billion. Total assets (both current and long-term) totaled to $7.439 billion. With total liabilities at $5.742 billion, it means that the company has a strong common equity position of $1.697 billion getting into the third quarter of 2020.

BBBY has set aside $250 million in essential capital expenditures to facilitate strategic growth plans for the fiscal year 2020. With its abundant cash position alone, investors can rest easy that the company has enough potential to turn the tide and invest in digital transformation to improve its omni-channel shopping.

The company’s decision to close 63 stores in the 3rd quarter of 2020 could have some counter effect as the timing is too drastic. First off, prior to 2019, BBBY had not designed a concrete omni-channel that supported e-commerce. Store closure could affect growth and profitability patterns. However, we are hopeful that the company will initiate a quick turnaround in the remaining stores to steer growth into 2021.

Order Fulfillment

To improve order fulfillment, BBBY is teaming up with Google (GOOG) by way of the latter’s cloud analytics platform. The company hopes to enhance marketing and e-commerce by elevating seamless delivery and flexible fulfillment options. Additionally, BBBY aims to use the digital transformation to lower the current shipping costs that form part of the current high cost of revenue.

(Source: Silicon Angle)

Bed Bath & Beyond will utilize the BigQuery service as well as the Google Compute and Google Kubernetes engines. The real-time data derived will be used to make customer-centric decisions as well as predict future trends of sales. These metrics are essential in migrating to a digital environment.

For instance, Walmart (WMT) established a novel subscription delivery service, Walmart+, where customers can have unlimited home deliveries annually. In this system, customers are required to pay an annual fee of $98 and purchase a minimum of $35 for the deliveries to kick in. This service is a replica of Amazon’s Prime, which analysts estimate could have an additional 10 million subscribers by end of 2021. At an annual subscription fee of $119, Amazon currently has 150 million subscribers.

In my view, Bed Bath & Beyond will seek to convert its stores to e-commerce warehouses as Walmart is bent on doing. Rather than closing the stores, BBBY could convert the stores and operate them as e-commerce outlets. These stores have close proximity to customers’ homes. They can serve to decrease the delivery time and promote the one-day delivery promise.

Community Engagement

The success of Bed Bath & Beyond’s digital transformation strategy lies in its formulation of a community engagement policy. It will be necessary for the company to engage with consumers when purchasing the products online and when creating digital content.

I wrote about Kroger Company (KR) before the end of the first half of 2020, when the grocer was looking to integrate automation and artificial intelligence through CFCs. While the stock has reciprocated positively, it is imperative for the retailer to also consider improvement of its curbside pickup delivery service and inventory control.

Research by Incisiv on the Grocery Digital Maturity Benchmark indicated that there was a 20% growth in the number of grocers offering free product deliveries in 2020 after customers attained a particular order value. Further, more US customers added their preferred delivery services as curbside pick-up.

With the right digital transformation, BBBY will be on course to increase from its $2.69 billion revenue to an additional 15-20%. The 200 stores up for closure raked in about $1 billion in fiscal year 2019. The company will seek to transfer at least 20% of this revenue online or to other stores that will remain open in the brick-and-mortar space. It will also continue to take advantage of the back-to-college season.

Final Thoughts

Bed Bath & Beyond must prepare to compete with giant retailers like Amazon, Walmart and Target that have been spending huge amounts of money on restructuring their e-commerce spaces. It is expected that more orders will continue, as customers will require to refurbish their homes during this pandemic. Tritton, BBBY’s CEO, will seek to replicate the success of Shipt with Target in his new company, where he is barely a year old. The company has a strong common equity balance of $1.6 billion and a cash position of $1.4 billion that is sufficient to migrate into the digital space by 2022. The acceleration of BOPIS and curbside pickup delivery services will work to align the new administration with the shareholders.

Disclosure: I am/we are long BBBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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