Bed Bath & Beyond's (NASDAQ:BBBY) stock has plunged more than 80% over the past five years as the retailer struggles to keep pace with the competition amid a major retail shake-up. Revenue and margins declined as its desperate promotions failed to bring back shoppers.

Flickers of hope appeared last year after activist investors ousted CEO Steven Temares, brought in new board members, and hired former Target chief merchandise officer Mark Tritton as its new CEO.

A couple buys home goods.

Image source: Getty Images.

Unfortunately, Bed Bath & Beyond still posted poor third-quarter results in January and recently released an unexpected update on its fourth-quarter that broadly missed analysts' expectations.

In response, the company revealed a new $1 billion capital allocation strategy for upgrading its stores, reducing its debt, and buying back shares this year. Will those plans breathe fresh life into the struggling retailer?

What does Bed Bath & Beyond want to spend $1 billion on?

Bed Bath & Beyond plans to spend $600 million on reducing its debt, paying dividends, and buying back shares, plus another $400 million on new store renovations and supply chain upgrades.

The company didn't specify exactly how it would split the $600 million between debt, dividends, and buybacks. However, it stated there would be a "heavier weighting" toward buybacks and that $1.2 billion still remained in its prior buyback authorization of $2.5 billion.

The remaining $400 million would be "primarily" invested in stores, IT and digital projects, and improving its supply chain infrastructure. It plans to remodel about 25 locations this fiscal year with additional renovations to come in 2021. Its recent initiatives include reducing in-store inventories by up to 20%, reducing clutter, widening aisles, and adding more marketing signage.

Can Bed Bath & Beyond afford this turnaround plan?

Investors might be wondering how Bed Bath & Beyond can afford to spend $1 billion on those efforts when its cash and equivalents fell 10% year over year to $900 million in the fiscal third quarter. Its long-term debt was also nearly unchanged at $1.5 billion.

However, Bed Bath & Beyond sold about half of its real estate portfolio -- 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 in a leaseback deal in early January.

It also recently sold PersonalizationMall.com to 1-800-Flowers.com for $252 million. The proceeds from those two deals should be recognized in the fourth and first quarters, boosting its cash position above $1 billion again.

The future still looks grim ...

Here's how badly Bed Bath & Beyond's business deteriorated over the past year.

Metric

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Comparable sales

(1.8%)

(1.4%)

(6.6%)

(6.7%)

(8.3%)

Gross margin

33.1%

34.7%

34.5%

26.7%

32.3%

Data source: Bed Bath & Beyond quarterly reports.

The company has struggled in the wake of major rivals like Amazon and Walmart, while its coupons and loss-leading Beyond+ membership plan hurt gross margin. Comps fell another 5.4% in December and January as aggressive promotions failed to win over shoppers during the holidays.

Tritton is focusing on clearing out excess inventory with mass promotions instead of coupons, replacing those products with more appealing ones and expanding its e-commerce ecosystem. But it's essentially the same song and dance we've seen at other struggling retailers like J.C. Penney and Macy's.

Tritton's decision to fire six senior executives -- including its chief merchandising officer, chief marketing officer, and chief digital officer -- was aggressive, but there's no guarantee that bringing in fresh talent can plug up the holes of this sinking ship.

Bed Bath & Beyond still has the wrong priorities

Bed Bath & Beyond is clearly trying to contain the fallout from its abrupt fourth-quarter warning earlier this month. However, its $1 billion capital allocation plan doesn't tell us anything new, and its prioritization of wasteful buybacks is discouraging.

When it sold half its real estate portfolio, I assumed that it would apply most of that cash toward aggressive renovations and e-commerce improvements instead of buybacks. Instead, Bed Bath & Beyond is merely renovating less than 2% of its 1,524 stores and treading water with vague promises.

Moreover, $400 million isn't nearly enough to reboot a failing retailer. Walmart and Target invested billions in their stores and e-commerce platforms in order to stand a chance against Amazon. Investors should dismiss this $1 billion "turnaround plan" as a knee-jerk response to its fourth-quarter disaster, which won't solve the company's problems long term.