Sell Bed Bath & Beyond On Q3 Earnings, Consider Buying Wayfair (NASDAQ:BBBY)

Bed Bath & Beyond (NASDAQ:BBBY) is fighting for its life. The omnichannel domestic wares retailer is aggressively moving ahead with streamlining its SG&A profile with a new round of layoffs, the closure of 150 brick-and-mortar stores, and realising around $250 million in cost savings by the end of its fiscal 2022. The company’s fiscal 2022 third quarter earnings call was sombre, with management moving forward with an additional $80 million to $100 million in cost savings with an overall tone that signalled just how much in distress the company is. Overall, the savings should see the company realize around $600 million in cost efficiencies, with employees across the corporate, supply chain and store portfolio taking the brunt of the latest round of layoffs. The future now seems bleak with a chapter 11 filing floated by bears as a very real possibility in 2023. Indeed, the $190 million market cap Union, New Jersey-based retailer has hired restructuring consultancy AlixPartners and restructuring lawyers at Kirkland & Ellis for guidance.

However, Bed Bath & Beyond’s loss will likely be Wayfair’s (W) gain. Both companies are competing for the largest gross merchandise value share of US home decor sales and Wayfair’s market share has pulled ahead over the last four quarters from what used to be a Bed Bath & Beyond leadership.

Boston, Massachusetts-based Wayfair, a $4 billion eCommerce company, saw its 2022 third quarter share of US home decor GMV at $300 million. This was versus $180 million for Bed Bath & Beyond. Whilst both suffered a comparative decline, Bed Bath & Beyond’s fell by about a third, and at a stark divergence from the year-ago comp where it had a larger GMV share than Wayfair.

Wayfair has now captured at least 40% of Bed Bath & Beyond customers’ wallets. A clear dominance that has even come ahead of the nearest closest competitor Overstock (OSTK). The play here is Wayfair’s outperformance and dominance of US home decor GMV will speed up on continued Bed Bath & Beyond headwinds. Employee turnover, low morale, and potentially lower marketing spending would be some of the factors driving this shift.

Whilst Bed Bath & Beyond’s bulls would be right to state that home decor sales account for substantially less of its overall revenues, the decline and capitalization on its woes by Wayfair now forms an investable investment play. This play could of course turn awry if Bed Bath & Beyond is able to survive its disruption. The company just released fiscal 2022 third quarter results ending November 26, 2022, which shed light on its balance sheet strength as bears eye a liquidity gap that could shift the company to no longer remain a going concern.

Bed Bath & Beyond’s Fiscal 2022 Third Quarter Results

Bed Bath & Beyond just published earnings for its fiscal 2022 third quarter that saw revenue come in at $1.26 billion, a decline of 33% from the year-ago quarter and a miss of $8 million on consensus estimates. The company blamed this on a decrease in customer traffic and lower in-stock provision. GAAP Gross Margin of 22.1% was a decline from 27.7% in the prior second quarter and came on the back of continued clearance activity, promotional activity and the discontinuation of higher margin Owned Brands merchandise.

We’ve now seen the previous positive dichotomy between Bed Bath & Beyond’s gross margins versus Wayfair’s fall into negative territory. Wayfair’s fiscal 2022 third quarter earnings saw its gross margins at 29%, higher than Bed Bath & Beyond’s second and third quarter gross margins. Wayfair’s third quarter revenue also came in at $2.8 billion, a smaller 10.3% decrease from the year-ago quarter but a miss by $10 million on consensus estimates.

Wayfair’s Way Forward

Whilst Bed Bath & Beyond would participate in the broad stock market rally to close out the day with a 28% gain, the results held little for bulls to cheer for. Net loss for the quarter came in at $392.97 million, a 42% increase from $276.43 million in the year-ago comp. This came in spite of cost reduction initiatives that drove SG&A expense of $583.6 million, down from $698 million in the year-ago quarter. And whilst net loss for the third quarter included $100.7 million of non-cash impairment charges, negative cash flow from operations was still elevated at $307.6 million. This was against cash and equivalents of $153.5 million as of the end of the quarter. Overall liquidity including an asset-based lending facility and FILO loan was around $500 million, less than two quarters of cash runway at the current pace of quarterly cash burn.

It’s hard to ascribe a future to Bed Bath & Beyond with so little runway left and with cash burn from operations still so virulent. This clears a pathway forward for Wayfair where current home decor GMV trends continue even as a discombobulated US housing market continues to drive a decline in overall sales for the sector. Pending home sales are falling just as the US is predicted to slip into a recession this year. There is a positive correlation between home sales and demand for decor.

Both Wayfair and Bed Bath & Beyond are down markedly over the last 12 months, with Wayfair having realized a 77.7% retracement versus 85% for Bed Bath & Beyond. This has pulled Wayfair’s underlying valuation metrics into positive territory. Its price-to-forward sales multiple now stands at 0.33x, a 62% difference from its peer group median of 0.89x. The company also held cash and equivalents of $1.29 billion. However, this was against cash burn from operations of $431 million. Fundamentally, a Bed Bath & Beyond collapse would now most directly benefit Wayfair and renders the eCommerce company a watchlist consideration for investors looking for exposure to the eventual recovery of the sector.