Mark Tritton has been CEO of Bed Bath & Beyond (BBBY) for barely more than a year. Despite spending much of 2020 navigating the COVID-19 pandemic, Tritton still found time to develop a comprehensive turnaround plan for the core business. Meanwhile, Bed Bath & Beyond has moved quickly to shed noncore business units to simplify the company and raise cash.
Tritton put the final touches on that asset sale program earlier this week, as Bed Bath & Beyond announced an agreement to sell Cost Plus World Market. The company also beefed up its share repurchase program. Let's see what these moves mean for investors.
Cost Plus World Market finds a buyer
Bed Bath & Beyond announced earlier this year that it was narrowing its strategic focus to the home, baby, and wellness/beauty markets. Aside from its namesake brand, the buybuy BABY and Harmon Face Values chains clearly fit into that strategic focus. However, that left a lot of smaller brands that were no longer considered core to the company's mission.
During the first three quarters of fiscal 2020, Bed Bath & Beyond raised about $500 million from selling noncore assets. These included PersonalizationMall.com, One Kings Lane, Christmas Tree Shops, its institutional business (Linen Holdings), and a distribution center in Florence, New Jersey.
That left Cost Plus World Market as the only noncore asset remaining on the auction block. On Monday, the company announced an agreement to sell that retail banner -- including 243 brick-and-mortar stores, an e-commerce business, two distribution centers, and a corporate office -- to Kingswood Capital Management, a private equity firm. The deal is set to close before the end of Bed Bath & Beyond's fiscal year in February.
Bed Bath & Beyond did not disclose the sale price. That suggests it is just a fraction of the $495 million the company spent to buy Cost Plus World Market in 2012. Still, the purchase price is a sunk cost. Indeed, the loss the company is taking on Cost Plus World Market is a trifle compared to the roughly $14 billion plunge in Bed Bath & Beyond's market cap since May 2012. What's more important is that Bed Bath & Beyond is simplifying its operations so that management can focus on the biggest profit improvement opportunities.
Pouring more money into buybacks
At its virtual investor day in late October, Bed Bath & Beyond announced plans to repurchase $675 million of stock by the end of fiscal 2023. That included a $225 million accelerated share repurchase program to be completed by the end of fiscal 2020. In conjunction with the Cost Plus World Market sale, the company increased that accelerated share repurchase and the total buyback program by $150 million each.
Bed Bath & Beyond ended its fiscal second quarter with nearly $1.5 billion of cash and investments on hand -- and that was before it received about $250 million from its most recent round of asset sales. Regardless of the sale price for Cost Plus World Market, Bed Bath & Beyond clearly has enough cash to fund these share repurchases.
Based on the current stock price, repurchasing $375 million of stock by the end of fiscal 2020 would shrink the share count by about 15%. That could provide a significant long-term boost to earnings per share. However, this ultimately depends on the success of management's turnaround initiatives.
The key question remains unanswered
Bed Bath & Beyond posted adjusted EPS of just $0.46 last year, down from $1.97 a year earlier. It then posted a massive loss in the first quarter of fiscal 2020, which coincided with the initial wave of the COVID-19 pandemic. While it has since returned to earnings growth, it is still likely to ring up a substantial full-year loss for fiscal 2020. Ultimately, the company must significantly improve its profitability through gross margin expansion and cost cuts to live up to its current share price, no matter how much stock it repurchases.
Tritton's turnaround plan for Bed Bath & Beyond seems sensible enough. However, the company faces stiff competition, and the surge in demand for home-related items that has helped it recently may reverse as the pandemic recedes during 2021. Investors may want to wait for more proof that Bed Bath & Beyond can achieve sustainable margin gains before committing money to this retail turnaround story.