‘The consumer is abandoning’ Bed Bath & Beyond, analyst says

Seth Basham, Wedbush analyst and Michael Lasser, UBS managing director and senior analyst, weigh in on the state of Bed Bath & Beyond amid its recent stock volatility.

Video Transcript

JULIE HYMAN: All right, the meme mayhem continues. Wall Street Bets darling Bed Bath & Beyond seeing a bouncy ride this week with the stock defying gravity compared to other retailer's, other memes, even other overall markets. The moves are not going unnoticed, of course. GameStop chairman Ryan Cohen is saying-- filing to potentially sell his stake in the company after this wild ride that we have seen.

Joining us to discuss, Michael Lasser, UBS managing director and senior analyst. And Seth Basham, who is a Wedbush analyst. And both of you guys have sell ratings, as of today, on this stock after all that we have seen here. Michael, I want to start with you and what we've been seeing in the stock.

I mean, as [INAUDIBLE] pointed out earlier, we have seen a year over year-- a years long, I should say, slide in sales. What do you think people are seeing in this company?

MICHAEL LASSER: I think that the company is still very challenged. Its sales, as you pointed out, have been under immense pressure. That's going to probably continue. This is even before we're in a real, true consumer recession. The stock has been disconnected from the fundamentals.

It's been due to fund flows in the market, noise. And as the stock becomes re-coupled with what's actually happening at the company, there's going to be a significant amount of downside.

BRIAN SOZZI: Seth, why haven't we heard from Bed Bath & Beyond's interim CEO, Sue Gove. You would think maybe this week would be a good time to raise cash.

SETH BASHAM: Well I think they're in the process of considering options to shore up the balance sheet. They're looking at options, including a net market offering of equity, and they're also looking at potentially a FILO loan, First In Last Out loan, associated with their asset based lending facility.

So as they cement those plans, I suspect that we'll hear more from the company.

BRIAN SOZZI: Michael, do you expect Bed Beth-- even if they do get money, do they survive, or is this another Sears setup?

MICHAEL LASSER: The road ahead is going to be long and filled with a lot of challenges. If they do come out of this challenging situation, the business could look a lot different. It'd probably look smaller. Not a lot of examples in history of retailers who can come back from experiencing this sort of challenge.

The fundamental issue is that the consumer is abandoning Bed Bath. Traffic has been under immense pressure to try and recapture folks to come into the store. It's just not easy, especially given the company's historic strategy of sending out a lot of coupons. So they have to choose between pressuring their profitability by discounting, or not pressuring their profitability by discounting and sacrificing sales.

JULIE HYMAN: Seth, I've got to put you on the spot a little bit because your sell recommendation came just today. So I'm wondering, what was the catalyst for you to finally change your mind and say, this guy-- this stock is not going to recover in the near term.

SETH BASHAM: Yeah. Well from a stock trading perspective, we think the fact that RC ventures plans to liquidate its entire stake in the stock is a telling sign that there's less and less support of key fundamentally-driven investors in this name. And with that catalyst, we think the stock can reverse its course and start trading down.

BRIAN SOZZI: We're showing Bed Bath shares down close to 30% today. This has been a volatile week. Let me put this question to both of you. Michael, I'll start with you because I've known you for some time. As an analyst covering other companies I would say are normal, what is a week like this for you?

When we're seeing these wild swings and price changes, what are your client calls like? What do you do with your models? Take us through the experience.

MICHAEL LASSER: It's a busy week, Brian. Not only because of what's been happening with volatility and Bed Bath, but also we've got a lot of information from large retailers like Walmart, Target, Home Depot and Lowe's. It's been interesting to hear what's been going on with the consumer.

The key takeaway is that the consumer is showing more volatility in their spend. Spend is becoming more episodic around key events like back to school. It's becoming more correlated with external challenges, like gas prices. And what that means is as we move into the next few months, we probably are going to see more pressure on the consumer.

Spending is going to continue to be erratic, and it's really going to depend on what happens with the labor market. If the labor market takes a step down from here, even though it's been very strong, that's going to create a lot of uncertainty heading into 2023.

BRIAN SOZZI: Seth, I wrote a piece earlier in the week. I went into these stores and just saw high levels of discounting. I wrote that story and the response of social media, it's putrid. You can't even read some of this stuff. These people have to go on block. Have you ever just considered dropping coverage of Bed Bath and said, you know what, it's just not worth it.

SETH BASHAM: Yeah, it's not out of the question. Relative to the rest of my coverage universe, there's a relatively limited interest in it, from an institutional investor standpoint. But at the same time, we think it's a company that's worthy of attention because they have a significant amount of sales in the home furnishings industry.

So we're continuing to cover the company, and we see a lot of challenges ahead, as Michael pointed out.

JULIE HYMAN: And Michael, kind of on a related note, I mean, how do-- you guys, what you do is financial modeling based on what you're seeing in terms of sales in the show. Just like basic business school stuff, obviously at a much higher level. But like, this is what they're selling, this is how much of it they're selling, this is how much it costs them.

How do you model for retail investors getting involved in a stock like this? Like how do you even incorporate that?

MICHAEL LASSER: Well we would make the point that there's really no change in the economic value of a business based on who owns the stock. The reality is, the value of a business is going to be based on the cash flows that the company is able to generate over the long term.

And that's really what we're focused on. A lot of the other volatility created by some of the noise is exogenous to that. So at the end of the day, our job and what we work hard to do, is try and come up with a very cogent picture of what the outlook for this business is and the cash flows that it's going to produce.

JULIE HYMAN: Right. And I guess what that's showing right now is definitely not necessarily what we've seen reflected in the market. So Seth, bottom line here. What can Bed Bath do? What are the key things it can do to potentially turn things around?

SETH BASHAM: Yeah, there are a number of things they can try to do, but they're fighting an uphill battle because they've lost so many customers. And getting those customers back in their stores and shopping online is going to be challenging. There's the price perception issue they have right now.

There's an assortment challenge that they have right now. It's gone way too far into private label brands. So they're going to have to revamp their marketing, revamp their promotional strategy, revamp their assortment in order to draw that attention, draw that customer back in the store.

So those are things they can do. Will they be able to do it? It remains to be seen. It will be challenging.

BRIAN SOZZI: Michael, I imagine you talk to a lot of vendors as part of your analysis on a company like Bed Bath. Have you heard any signs or indications that they are starting to pull support for Bed Bath, or change their credit terms?

MICHAEL LASSER: We have not. But that is a key issue to watch. At the end of the day, what a retailer-- what a retailer requires to operate is the trust. The trust of all its partners, whether it's vendors, suppliers, employees. And that's going to be critical to its long term viability and what this business looks like over the long run.

BRIAN SOZZI: Gents, this was incredibly helpful to the Yahoo Finance universe. We appreciate it. Michael Lasser, UBS managing director and senior analyst and Seth Basham, Wedbush analyst. Thank you so much.