1 Reason to Buy Bed Bath & Beyond Stock, and 1 Reason to Stay Away

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There's no shortage of once-great retailers stumbling as they try to adapt to a changing world. Bed Bath & Beyond (NASDAQ: BBBY), a seller of domestics and home furnishings, is a prime example. The retailer has been able to keep revenue growing until recently, but margins have been in free fall for years. An overdependence on its ubiquitous "20% off" coupons is partly to blame.

In 2011, Bed Bath & Beyond managed a gross margin of 41.4% and an operating margin of 16.5%. Over the past 12 months, those metrics have tumbled to 36.6% and 7%, respectively. Share buybacks have propped up the company's per-share numbers over the years, but that only masks the underlying problem.

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Despite these issues, there's at least one reason to consider buying shares of Bed Bath & Beyond.

A very cheap stock

Bed Bath & Beyond's stock price has plunged right along with its earnings over the past few years. Since peaking in early 2015, shares of the retailer are down a whopping 72%. The company is valued at just about $3.1 billion.

Bed Bath & Beyond's stock deserved to be punished, given the company's poor performance. This has created a situation where the stock trades at a rock-bottom valuation. Bed Bath & Beyond expects to produce earnings per share of $3 for the full year, results for which it will report in April. That puts the price-to-earnings ratio at just 7.4.

Other valuation metrics are plumbing the depths as well. The price-to-book ratio sits at just 1.1, although a decent chunk of the company's book value is tied to goodwill from acquisitions. Price to tangible book value, which backs out those intangible assets, is about 1.5. That's about where it was during the dark days of the financial crisis nearly a decade ago.

The price-to-sales ratio is roughly 0.25. Prior to late 2017, this metric had never been anywhere close to this level. Even during the financial crisis, the price-to-sales ratio only briefly dipped below 1.

On top of being cheap, Bed Bath & Beyond stock sports an enticing dividend. The current quarterly payment of $0.15 per share works out to a dividend yield of 2.7%. The payout ratio, based on the company's 2017 earnings guidance, is just 20%. The dividend would still be safe even if per-share earnings were cut in half.

Despite all its problems, Bed Bath & Beyond is still a profitable retailer. It's possible that the stock is a value trap -- it's looked cheap for much of the past few years only to disappoint investors. This is a stock that can burn you if the company is unable to stabilize its bottom line. But if Bed Bath & Beyond finds a way to stop the bleeding, those rock-bottom valuation metrics won't remain rock-bottom for long.

Competition is a problem

No matter how cheap Bed Bath & Beyond stock gets, fierce competition is a good reason to steer clear of the retailer. The 800-pound gorilla is Amazon, but Bed Bath & Beyond is facing a slew of other threats as well.

Wayfair (NYSE: W), an online furniture and home goods retailer that doesn't seem to care about turning a profit anytime soon, is growing like gangbusters. During the fourth quarter, Wayfair produced year-over-year revenue growth of 46.2%. The company is approaching $5 billion of annual revenue, although it's also burning cash at an increasing rate.

Some traditional retailers are also ramping up their efforts to compete in Bed Bath & Beyond's bread-and-butter categories. Walmart (NYSE: WMT), in an effort to garner more online sales, recently rolled out a new online home goods shopping page, selling everything from kitchen utensils to large furniture. The company is trying to shed its image as a low-end retailer and win customers that normally wouldn't shop at Walmart.

Given all of this competition, the days of 15%-plus operating margins for Bed Bath & Beyond are probably over for good. Bed Bath & Beyond stock is cheap, but it may not be a true value stock. If earnings continue to plummet as competitors chip away at its market share, the stock may not bottom out anytime soon.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Wayfair. The Motley Fool is short shares of Bed Bath & Beyond. The Motley Fool has a disclosure policy.