Why This Bed Bath & Beyond, Wayfair Analyst Recommends Selling Shares

Hardline retailers are likely to face tougher comparisons following the COVID-19 spending spree, positioning them for a hard landing, according to an analyst at Morgan Stanley.

The Retail Analyst: Simeon Gutman downgraded shares of Bed Bath & Beyond Inc. BBBY from Equal-weight to Underweight and lowered the price target from $18 to $12.

The analyst also downgraded Wayfair Inc. W from Equal-weight to Underweight and took down the price target from $290 to $195.

Retailers Stare At Tough Comps: Many retailers have seen unprecedented revenue growth since 2019, and the current consensus assumes sharp declines in 2022, followed by growth in 2023, analyst Gutman said.

Strong labor income and drawdown of stimulus savings will likely support personal consumption expenditures and therefore the mean reversion will be less dramatic than feared, the analyst said.

Durable goods categories, including home improvement and sports equipment, will likely grow through 2023 at a rate well above historical stacks, Gutman said. The analyst, however, sees softer-than-expected landings for home furnishing and consumer electronics in 2022 and 2023.

Related Link: Why BofA Is Bearish On Bed, Bath & Beyond

Bed Bath & Beyond's Market Share Loss Exemplifies Risks: Bed Bath & Beyond's core business faces challenges and its value proposition has eroded, the analyst said.

Among the multiple risks faced by the company are erosion of value proposition, loss of market share, persisting gross margin and expense headwinds and accelerating e-commerce encroachment, he said. 

"A tough category backdrop combined with market share losses underpins our Underweight rating." 

Wayfair To Face Top-, Bottom-line Pressure: The specter of declines in the home furnishings category in both 2022 and 2023 will likely weigh on Wayfair's near-term sales and negative profit implications, Gutman said.

Retail Stock Price Action: Bed Bath & Beyond shares were down 1.12% at $14.28 midday Thursday, while Wayfair was up 1.76% at $239.58.

Related Link: Wayfair Stock Falls After Downgrade By Jefferies