Management at Bed Bath & Beyond (NASDAQ:BBBY) wants you to have faith in their turnaround efforts. Despite years of failed initiatives, the loss of billions of dollars in shareholder value, and no real proof the home furnishings retailer is on the right track, they say they've finally found the prescription for what ails it.
A trio of activist investors isn't buying it, and neither should you. Not that the hedge funds will necessarily have an easier time of reversing Bed Bath & Beyond's decline if they're successful in replacing the CEO and entire board of directors, but the fresh thinking that would come from cleaning house could be just what the retailer needs.
A threadbare performance
Management refused to address questions about the looming proxy battle during its earnings conference call with analysts, saying they were there to discuss Bed Bath & Beyond's financial results, but it was apparent the investor actions hung over the discussion.
Management raised its dividend for the third consecutive year, increasing it by a penny to $0.17 per share, a 6% hike that has the payout yielding 3.8% annually. It also bought back more of its stock, some $78 million worth, representing about 5.2 million shares.
But those were all the arrows management had in its quiver to show investors positive movement. Total sales tumbled 11% to $3.3 billion during the fiscal fourth quarter, mostly due to a 53rd week of selling in 2017, while comparable-store sales were down again, this time by 1.4%. It also posted an operating loss $297 million, compared to a profit of $337 million a year ago, because of a $510 million impairment charge related to goodwill. Management said it didn't necessarily have anything to do with the performance of the acquisitions it's made over the years but rather with its shareholder equity.
Because the home furnishings retailer has been in a tailspin, its market capitalization has deteriorated significantly and SEC regulations require that companies perform annual financial tests on their goodwill. For a business whose market cap has fallen below its shareholder equity, a writedown on the value of the goodwill it carries may be required. Goodwill is the difference between what a company pays for an acquisition and the value of the tangible assets like property, plants, equipment, and inventory it receives. Essentially, it's the premium paid for a business' name and reputation.
Adjusted for the impairment, Bed Bath & Beyond reported earnings per share of $1.20, though that was still worse than the $1.41 per share earnings it posted a year ago.
Don't discount discounting, yet
What's alarmed many investors is the retailer's plan to greatly reduce the availability of its ubiquitous 20% off coupons. Although they're used to get people in the door, they're effectiveness is waning, but without a backup plan in place, limiting the coupons could result in a complete collapse in sales.
Legion Partners, Macellum Advisors, and Ancora Advisors issued a statement after the earnings report expressing dismay at the direction Bed Bath & Beyond was taking. The deteriorating financial position was bad enough, which the hedge funds said was indicative of how out of touch management was with the problem since it hasn't offered any real solutions, but the elimination of the coupons was more disastrous.
"In our view, it does not make sense to make any couponing adjustments prior to executing on initiatives that would fundamentally improve the in-store experience for customers and drive retail traffic," they wrote in a filing. Essentially, if the home furnishings retailer didn't have a Plan B to fall back on, then hamstringing sales by getting rid of the one thing that was still bringing customers in was a mistake.
They reiterated the need to replace the CEO and entire board, and said they would be unveiling their own plan for a turnaround over the next few weeks.
An opportunity for change
Bed Bath & Beyond still faces an uphill battle. The home furnishings market is highly competitive, so much so that At Home Group is thinking about putting itself up for sale. The industry is also moving online.
Unlike At Home, whose online site just redirects customers to its physical stores, Bed Bath & Beyond has an e-commerce presence though its digital sales growth isn't enough to offset the decline at its physical locations. Yet a new management team could breathe new life into by leveraging them with its online presence.
Much like Walmart was able to transform a flagging physical store performance into a sales juggernaut again by comprehensively linking them to an omnichannel experience, Bed Bath & Beyond could take a similar approach. But it seems it's going to take a new management team to pursue that level of change, one which rejects symbolic gestures like dividend increases and stock buybacks in favor of concrete actions.