Bed Bath & Beyond (NASDAQ:BBBY) reported another disappointing quarter. Net sales declined 0.2% and comps fell 1.2% (analysts were expecting comps growth of 0.5%). Strong growth in digital platforms offset most of the shortfall caused by weak traffic, but there are some worrying secular trends that investors should be aware of. BBBY trades at a major discount to its 5-year averages on a P/E, P/S, and P/CF basis, but the housing market is finally starting to cool off. Growth going forward will not resemble the average 6.7% compound annual growth BBBY achieved over the past five years. BBBY's business fundamentals are deteriorating, and we think investors should be careful.
The housing market is starting to slow down, and the US economy is getting weaker. Home improvement stores were one of the worst-performing retail groups in August. Management expects to grow sales 1.25% to 1.40% for the full year (with comps flat to up 1%) due to rising home prices and housing turnover, but we think sales will come up short of expectations. Rising home prices are usually a demand-driver for home-improvement retailers due to the wealth effect, but now that the housing market has reached a mature stage (and is more dependent on first-time homebuyers), rising prices could be a headwind if it crowds out a large enough portion of would-be homebuyers. This is what appears to be happening. Low inventories are a big reason for the problem, and rising land, labor, and construction costs will prevent homebuilders from ramping up capacity anytime soon.
