Bed Bath & Beyond (NASDAQ:BBBY) stock has been in a downward spiral for the last several years, with the stock down about 75% over the past decade. Investors have all but written off the once-prominent retailer of home goods, and for good reason.
Slowing revenue growth has been attributed to the strength of competing retailers like Target, and particularly online retailers Wayfair and Amazon. It is, no doubt, a difficult business to be in. Home goods can be bought online for less, and you don't even have to leave the comfort of your living room. But it's not time to abandon ship. Although the odds are stacked against it, Bed Bath & Beyond still has levers to pull.
A saving grace for Bed Bath & Beyond stock has been the relatively large cash pile it's kept on its balance sheet. The company had just over $900 million in cash and short-term investments at the end of July.
This cash is being put to work, but instead of using it to invest in its online presence, Bed Bath & Beyond is using that cash to pay dividends and repurchase stock. In the most recent quarter, it repurchased 5.3 million shares of its own stock.
Given the company hasn't cut its dividend -- the stock now yields around 7% -- and is still actively buying back stock, I believe it may have some tricks up its sleeve still to be revealed. The company could, for instance, take itself private given its large cash position and current market cap of $1.03 billion. It would be a long shot, but could improve the likelihood of the company surviving.
Activists are involved
Despite its stock price steadily declining since 2015, I don't believe Bed Bath & Beyond realized it had significant problems until this year, when activist investor groups began to get involved, shortly after the company posted an operating loss of $87.1 million.
While this was primarily due to a one-time goodwill impairment, the red flags went up, signalling that the company needs help. While activist investor involvement might sound negative, it supports the idea that this company not only has a place in the retail market, but is backed by people that want to see it succeed. One such activist investor group is Legion Partners, which owns just over 10% of the company. You may have heard of Legion from its recent involvement with Papa John's, in which it also holds a significant position. While still too early to tell if Papa John's is making a turnaround, Legion is making big moves to help rebrand the pizza chain. I think it's plausible to believe it could make a substantial impact on Bed Bath & Beyond.
This investor group, accompanied by a couple of others has called for change, and their pressure led to the resignation in May of CEO Steven Temares, who had been at the helm since 2003. He was replaced by interim CEO Mary Winston, who was the prior CFO for Family Dollar. Winston, along with the board, believes the company can still make a comeback and has initiated cost-cutting across the company.
The first step of this turnaround was by cutting roughly 7% of corporate staff including directors, vice presidents, and even the chief operating officer position . The company believes this will provide annual pre-tax savings of $30.7 million. While this won't be a game-changer for the company, it is a step in the right direction.
Another concern investors have voiced is about the excessive use of couponing in the Bed Bath & Beyond business model, stating they cut into already low margins. Winston has begun adjusting coupons by eliminating coupons for certain items and adding requirements for minimum purchases . Given the company has built its advertising around the idea of consistent couponing, I think getting rid of them entirely would be a death sentence for the company. Coupons provide a great way to drive traffic into stores for specific deals. Perhaps the frequency of coupon use, targeting non-peak months to bring in customers, would be an effective addition to the changes in balancing a seasonal business whose traffic is primarily during back-to-school season and around the holidays.
Bed Bath & Beyond gives an update
On Sept. 4, Bed Bath & Beyond management released a "strategic update" to shareholders on the progress of the business transformation. The letter highlighted five things.
"Stabilizing and driving top-line growth" will be accomplished by implementing store renovations in time for the 2019 holiday season.The company said a "rapid refresh" of nearly 160 Bed Bath & Beyond stores is ongoing. The company has more than 1,000 stores in the United States, Puerto Rico, Canada, and Mexico.
The second key objective is "resetting the cost structure" by carrying out the aforementioned workforce reductions and by reworking lease agreements. This will be an ideal time to close underperforming stores and the company plans to begin to build up the digital channel.
The third objective is "reviewing and optimizing our asset base." This was perhaps the most interesting portion of the update. The company said it plans to reduce up to $1 billion of inventory over the next 18 months and also made comments about working with outside advisors to figure out a way to drive value from its current brands. This to me sounds like the company is looking to sell off some of the company.
The fourth point was about the "board transformation" and the fifth was about the search for a new CEO.
Management said "substantial progress" has been made in the search for a CEO and the company expects to announce its new leader in "the coming weeks." This is extremely promising news and was well taken by investors -- the stock popped 7% on Thursday. The next earnings call will be Oct. 2; investors will be looking for more updates then.
I believe Bed Bath & Beyond can be a value play if positive change can continue to be implemented through more cost-cutting and squeezing margin.