Bed Bath & Beyond's (BBBY +0.00%) stock recently plunged after the retailer delivered dismal third-quarter numbers. Its revenue fell 9% annually to $2.76 billion, missing estimates by $90 million, as its comparable store sales slid 8.3%. Its adjusted net loss widened from $2.7 million to $46.9 million, or $0.38 per share -- which missed expectations by a whopping $0.40.
It also withdrew its prior full-year guidance and didn't provide updated figures, claiming that CEO Mark Tritton -- who took the top job last November -- needed more time to "assess the business and finalize the details" of its new strategies and the "extensive senior leadership changes" over the past month.
Image source: Getty Images.
Tritton's long-term turnaround plans include clearing out the retailer's excess inventories with mass promotions instead of coupons, replacing those products with new ones to regain market share in home goods, expanding its e-commerce platform, and selling roughly half its real estate portfolio to a private equity firm.
Let's take a closer look at Tritton's real estate strategy, which could generate the most visible near-term effects, and whether or not it can solve Bed Bath & Beyond's bigger issues.
What did Bed Bath & Beyond sell?
Bed Bath & Beyond sold approximately 2.1 million square feet of commercial space, including an unspecified number of retail stores, a distribution facility, and corporate office space, to an affiliate of Oak Street Real Estate Capital for over $250 million.
Bed Bath & Beyond won't abandon those properties; instead, it will continue occupying them with long-term leases. This strategy, which we've seen employed by other struggling retailers like Macy's and J.C. Penney before, frees up cash for Bed Bath & Beyond's other turnaround plans.
That cash won't appear on Bed Bath & Beyond's balance sheet until its fourth-quarter report. Its cash and investments fell 8% annually to $920 million in the third quarter, while its long-term debt stood nearly unchanged at $1.49 billion -- so $250 million in fresh cash would certainly give it more breathing room.
However, selling and leasing back properties is a double-edged sword. It injects some quick cash, but it also burdens the retailer with recurring lease expenses which could offset any gains generated by its turnaround plans.
Image source: Getty Images.
What does the management believe?
During last quarter's conference call, Tritton stated that the sale marked "the first step toward unlocking valuable capital in our business" which can "amplify our plans to build a stronger and more efficient company to support revenue growth, financial stability, and shareholder value."
Tritton stated that the proceeds would be reinvested in the company's core business to drive growth, fund share buybacks, or reduce its outstanding debt -- but noted that the specifics "remain under review." Tritton also noted that the company "continues to evaluate" potential ways to monetize its remaining real estate.
Out of those strategies, pursuing growth will likely take precedence over buybacks or reducing debt. Bed Bath & Beyond's comps declines worsened over the past year, and its gross margins are still being throttled by aggressive promotions:
|
Metric |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
|---|---|---|---|---|---|
|
Comps growth |
(1.8%) |
(1.4%) |
(6.6%) |
(6.7%) |
(8.3%) |
|
Gross margin |
33.1% |
34.7% |
34.5% |
26.7% |
32.3% |
Source: Bed Bath & Beyond quarterly reports.
Buybacks will likely be the lowest priority, since Bed Bath & Beyond caught falling knives with its previous buyback plans. It only spent $1.2 million on buybacks during the third quarter, and it should repurchase even fewer shares until its outlook improves.
Buying some time... but not any solutions
Bed Bath & Beyond's real estate sales don't solve any problems on their own. They merely buy the retailer more time and breathing room for its turnaround efforts.
For now, many of its core problems remain. It faces brutal competition from Amazon, IKEA, Walmart and Tritton's former employer Target. Its stores are too large, its inventories are too high, and it's running its Beyond+ membership plan at a loss.
A few flickers of life appeared in the third quarter, including 7.1% comps growth during the five-day holiday shopping week between Thanksgiving and Cyber Monday, but most of that growth was driven by margin-crushing promotions. Selling its stores will unlock some capital, but I'm not convinced that it's enough cash to fund a full-blown turnaround yet.
