By Sabrina Escobar

Overstock.com seemed to have nabbed the hottest deal of the summer when it bought Bed Bath & Beyond's brand out of bankruptcy. But as the weather cools, fears that the deal was too good to be true have started bubbling up.

Overstock (ticker: OSTK) paid $21.5 million in June to acquire Bed Bath & Beyond's intellectual property and name. By August, the company, known as an online furniture liquidator, had changed its public-facing name to Bed Bath & Beyond, seeking to capitalize on a brand that was better known among consumers. The corporate entity continues to be called Overstock.com.

"Overstock has a great business model with a name that doesn't reflect its focus on home," CEO Jonathan Johnson told Barron's in August . "Bed Bath & Beyond is a much-loved and well-known consumer brand, which had an outdated business model that needed modernizing."

At the time, the move was seen as a slam dunk. The stock surged 76% from the day the company disclosed its bid on Bed Bath & Beyond to Aug. 1, the day the name change went through.

Investor enthusiasm has since cooled. The stock has fallen 52% from Aug. 1 to date, dragged lower by an update on the state of the change in corporate identity the company issued on Sept. 6. While the company saw some improvements to its web traffic and number of active customers, the improvements were smaller than Wall Street was hoping for.

"The BB&B name carries some key advantages over that of Overstock, namely higher brand awareness and a stronger association with home goods in the minds of consumers," wrote BTIG analyst Marvin Fong in a Thursday note. "However, the BB&B brand also comes with hard-to-ignore baggage. BB&B experienced a multiyear period of decline that likely damaged brand value."

Fong initiated coverage on Overstock with a Neutral rating Thursday. He doesn't have a price target on the shares. The stock dipped 0.6% to $17.85 Thursday.

Overstock had no immediate comment.

His biggest concern is that Bed Bath's core furniture and home furnishings operation competes more directly with the titans of retail-- Amazon.com $(AMZN)$, Walmart $(WMT)$ and Target $(TGT)$ -- than Overstock did. These companies also offer conveniences, such as same-day delivery or in-store pickup in store, that Overstock doesn't have.

In addition, these retailers, especially Amazon, have the leeway to undercut Overstock's prices. Currently, Bed Bath's prices are competitive, Fong added, but this may be coming at the cost of profit and margins as the company looks to reposition itself in a crowded market.

Overstock has recognized that winning back customers is key for the success of the rebranding, and it has undertaken a promotion blitz as a result. The company estimates Bed Bath had nearly 20 million active customers in its last year of operations, and that half of those made at least one online purchase in the past year. At its peak, Bed Bath had close to 40 million shoppers.

The company's leadership team has said that these initiatives will weigh on profitability in the near term, but Fong worries it will take more time for the efforts to pay off.

"Looking ahead, we are concerned that customer acquisition will be slower than OSTK hopes, meaning the investment phase may last longer than the telegraphed time frame of a few quarters," he wrote.

On the plus side, Overstock has a strong balance sheet with solid cash reserves, he added. The company will likely become more efficient with its marketing expenses, he said.

All in, Overstock is inheriting a strong legacy brand that could help propel long-term growth. But the company is also inheriting some of Bed its deep-seated challenges. Time will tell which side wins out.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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September 21, 2023 13:47 ET (17:47 GMT)

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