Shares of Bed Bath & Beyond (NASDAQ:BBBY) plummeted on Wednesday after the company made a couple of announcements prior to the market open. First, it revealed a share-repurchase plan. Second, it released an investor presentation including its three-year targets. While both were intended to be positive developments, investors apparently weren't as enthusiastic as management. As of 12:45 p.m. EDT, Bed Bath & Beyond stock was down 12%.
When a company buys back its own stock, it can boost shareholder returns because each remaining share in circulation represents a larger percentage of the company. For obvious reasons, Bed Bath & Beyond, stopped repurchasing its shares earlier in 2020. However, it just announced it will buy back up to $675 million worth of stock over the next three years -- and $225 million of that authorization is to be spent by Feb. 27 under an accelerated plan.
Turning to its three-year outlook, Bed Bath & Beyond presented a detailed plan. Regarding financials, management expects modest sales growth. However, it intends to boost profitability through better inventory management and debt reduction, ultimately resulting in between $500 million and $1 billion in cumulative free cash flow from now through the end of 2023.
Ironically, Bed Bath & Beyond was trading below $5 per share back around the time it stopped repurchasing stock. At the time, the company's market cap was lower than its current stock repurchase authorization. In other words, if management had allocated $675 million to buy its own stock in March, it could have repurchased all outstanding shares. Therefore, some investors will naturally feel like this buyback plan is poorly timed.
That said, these announcements are intriguing considering Bed Bath & Beyond's current valuation of $2.7 billion. Sure, it would in retrospect have been clever to have bought back a large quantity of its stock back in March. But to be fair, almost all companies had at that point paused those repurchases due to massive economic uncertainty.
That $675 million would have gone further several months ago, but it still isn't chump change. And management's projections for free cash flow are significant. In the end though, for Bed Bath & Beyond, everything will hinge on its ability to maintain its sales levels and even slightly grow them over the long term. The retailer was struggling in this regard even before the coronavirus; its sales fell 7% in 2019.