5 Tough Tasks for Bed Bath & Beyond's New CEO

Bed Bath & Beyond's (BBBY) stock recently surged after the retailer hired Target's (TGT -0.54%) chief merchandising officer Mark Tritton as its new president and CEO. Tritton will succeed Mary Winston, who held the interim CEO position after Steven Tamares' resignation in May, on Nov. 4.

It's easy to see why Bed Bath & Beyond's investors are excited. Over the past three years, Tritton led Target's transformation into an omni-channel leader by expanding its e-commerce ecosystem and keeping pace with Amazon (AMZN -1.65%) and Walmart (WMT 0.57%) with same-day deliveries and in-store pickups.

Image source: Getty Images.

As a result, Target's comparable store sales improved, its digital sales consistently rose by the double digits, and its stock surged more than 60% over the past three years. During the same period, Bed Bath & Beyond's stock plummeted over 70% as its comps growth turned negative, its margins contracted, and it struggled to stay relevant in the shifting retail market.

However, handing over the reins to Tritton doesn't necessarily guarantee Bed Bath & Beyond's survival. Let's examine five big issues that require Tritton's immediate attention.

1. Negative comps growth

Bed Bath & Beyond's comps growth stayed negative throughout 2018 and the first half of 2019, indicating that it was still losing shoppers to its online and offline rivals.

Source: Bed Bath & Beyond quarterly reports.

It expects that trend to continue and for its full-year sales to decline about 5%. Wall Street expects its sales to dip another 2% next year.

There aren't any easy ways for Tritton to end that slump, but expanding its mobile app (which saw a 90% annual jump in sales last quarter) and adding more pick-up locations and delivery options for online orders could get it back on the right track.

2. Contracting margins

During the second quarter, Bed Bath & Beyond stated that its "adjusted" gross margin rose 20 basis points annually to 33.9%. However, that figure excluded a big inventory writedown which reduced its gross margin by 7.2 percentage points. On a reported basis, which includes that impact, its gross margin declined both annually and sequentially to 26.7%:

Source: Bed Bath & Beyond quarterly reports.

3. Its addiction to margin-killing strategies

Bed Bath & Beyond's margins are withering due to its aggressive use of coupons and markdowns. Its loyalty program, Beyond+, exacerbated the pressure by offering free shipping (with no minimum purchase) and 20% discounts on all purchases for just $29 a year.

It estimates that loss-leading strategy reduced its gross margin by 50 basis points during the second quarter, but notes that Beyond+ members now shop two times more frequently at its stores and spend four times as much money as non-members.

Unfortunately, Beyond+ still isn't bringing in enough shoppers to boost its comps growth. It ended the second quarter with 1.3 million Beyond+ members, but that only marks incremental growth from its 1.2 million members in the first quarter. Amazon, by comparison, serves over 100 million Prime subscribers in the US.

Tritton needs to quickly deal with Bed Bath & Beyond's aggressive promotions and Beyond+ when he takes over. Otherwise its margins will continue to contract as its comps growth dries up.

Image source: Getty Images.

4. Right-sizing its stores

Over the past few years, Target launched smaller format stores to reduce its real estate and operating costs, maintain leaner inventories, and serve as pick-up locations for online orders. Target states that these smaller-format stores are much more productive than its larger ones.

Tritton should apply this strategy to Bed Bath & Beyond's stores, which have an average size of 45,000 square feet. Some of Target's smaller-format stores are as small as 15,000 square feet.

5. Closing stores and dumping non-core assets

Bed Bath & Beyond ended last quarter with 1,534 stores across its various banners. That only represents a slight reduction from its 1,560 stores a year earlier. Only 993 of those locations were Bed Bath & Beyond stores. The rest includes World Market, Cost Plus, Buybuy BABY, Christmas Tree Shops, That!, Harmon, Face Values, and One Kings Lane stores.

Many of those banners are dead weights on the company's top-line growth, and activist investors have called some of those acquisitions "corporate bailouts" for failed investments by the founders' families. Activist investors have demanded the divestments of those non-core banners, and it makes sense for Tritton to heed those calls.

Turnarounds aren't sure things

Tritton's arrival is encouraging, but investors should recall that many struggling retailers poached executives from stronger retailers to lead turnaround efforts before. Many of those efforts -- like Ron Johnson's disastrous run at J.C. Penney (JCPN.Q) -- flopped.

I'm not saying that Bed Bath & Beyond will suffer J.C. Penney's fate, but investors should wait to see meaningful results before betting that Tritton will save the struggling retailer.