Bed Bath & Beyond (NASDAQ: BBBY) shares are down nearly 5% on the session, following a JP Morgan downgrade to Underweight (from Neutral) and a new price target of $18.00 (from $21.00).

Analyst Christopher Horvers acknowledges the encouraging consumer and operating environment BBBY can leverage moving forward, as shares are up 16% since the House passed U.S. tax reform legislation. Consensus estimates for the Street, anticipate a roughly 50% flow-through of tax savings for BBBY, but Horvers tells clients, that assumption "could prove aggressive." The analyst notes BBBY's need to invest in "price, advertising and infrastructure," implying that BBBY management would actually need closer to "100% reinvestment of tax return benefits."

Horvers highlights multiple data points to support his thesis that BBBY potentially needs to reinvest almost 100% of tax saving, instead of the 50% assumption currently on the Street, as the company was unable to post positive comps during the best holiday retail environment in years. Furthermore, the tax cuts saving, coupled with a positive retail environment, have the potential to trigger competition for investment in fulfillment capabilities to compete with Williams-Sonoma Inc. (NYSE: WSM), Wayfair Inc. (NYSE: W) and Amazon.com Inc. (NASDAQ: AMZN).

Horvers further pointed to the -0.3% SSS last quarter despite including November, which was arguably the best month of the year for retailers and their work indicates trends have slowed sequentially QTD.

The analyst said further gross margin erosion appears inevitable and management might double down with a price match guarantee while stepping up coupon offers and expanding the Beyond Plus beta test.

Bed Bath & Beyond's advertising expense likely needs to accelerate, especially now that its online penetration is near the industry's and its peers’ customer acquisition spending is stepping up. Tax reform savings reinvestment could heighten the competition.

They believe the company will have to accelerate investment in fulfillment capabilities to effectively compete with W’s CastleGate and Amazon’s FBA. In addition, the company could be on the cusp of a store remodel initiative, which would further weigh on D&A and SGA, in addition to wage pressures.

The new valuation at $18 is based on the analyst's 2019 estimates at ~4x enterprise value to EBITDA and ~8x price to earnings multiples, with Horvers summarizing his thesis for the BBBY downgrade, commenting that "margin pressure will likely get worse before getting better, while sales may take longer to rebound as initiatives ramp."

The new price target represents 22% downside from Thursday's close.

StreetInsider Premium first published a variation of this article at 4:27AM ET. Try StreetInsider Premium for two weeks free and get news and research before the market moves. Join Here.