Home goods retailer Bed Bath & Beyond (BBBY) has had its fair share of bad news over the past several years. Sales have been falling, profits are gone, and management underwent a shake-up. And just when new CEO Mark Tritton was taking the helm, the COVID-19 pandemic broke out and closed stores.
Toward the end of October, Bed Bath & Beyond presented an ambitious turnaround plan to investors. The bad news that came along with the announcement was that this was also an expensive plan.
But there's finally some good news for this beaten-down company: Bed Bath & Beyond is suddenly flush with extra cash.
The ambitious turnaround plan
In the past, Bed Bath & Beyond did almost all its business in its stores, not online. Those stores included a significant amount of stale inventory, and its popular coupon strategy wasn't good for profits or building brand loyalty.
Tritton's turnaround calls for several changes, including remodeling stores, updating its supply chain, and investing in technology for a better omnichannel experience that blends physical stores better with online retail.
These are good moves for any retail business, Bed Bath & Beyond included. But change doesn't come cheap. The three aforementioned efforts overall will cost the company $750 million over the next three years. To be clear, they're necessary changes to improve the company's long-term chances of maintaining relevance. But $750 million is more than half the cash on the balance sheet.
What's the potential payoff? If everything goes according to plan, Bed Bath & Beyond expects to generate up to $1 billion in free cash flow over the next three years. Its current market capitalization is only $2.4 billion; if we assume the free cash flow is spread out evenly, then Bed Bath & Beyond stock trades under 10 times future cash flow. Almost anyone would agree that's a cheap value stock.
Good news: The company sold noncore assets!
Part of Bed Bath & Beyond's strategy includes getting rid of noncore brands, and the company is already succeeding. In October, it sold its Christmas Tree Shops brand, its Linen Holdings business, and a distribution center for $250 million. The primary part of this deal was the Christmas Tree Shops brand; in the company's 2019 annual filing with the Securities and Exchange Commission, it said that Linen Holdings' business was so small that it didn't have to be reported, even though it was technically a separate operating segment. By contrast, the Christmas Tree Shops business was relatively large with 81 locations.
Then in December, Bed Bath & Beyond succeeded in selling its Cost Plus World Market brand for an undisclosed amount. There's reason to believe it received significant compensation; consider that Cost Plus World Market was the company's second-largest brand with 243 locations.
I find the Christmas Tree Shops deal to be somewhat amazing. That segment is a brick-and-mortar discount retail business operating in a seasonal niche. It's hard to imagine how Bed Bath & Beyond got $250 million for that in this e-commerce-leaning age.
I'm not sure how Bed Bath & Beyond managed to do it all, but it's good news. The company successfully sold its non-core assets for cash, and this can be used to help fund its turnaround plan.
But there's not only good news
Bed Bath & Beyond is on the starting line of an expensive but necessary turnaround plan. However, the company has more plans for its cash than just fixing the business. It's also in the middle of an aggressive share buyback plan. Before Feb. 27, 2021, it intends to buy back $375 million in stock. And from then until the end of 2023, it plans to repurchase $450 million more for a total of $825 million in a three-year span. That's massive.
In theory, this is really good for Bed Bath & Beyond investors. Buybacks reduce the overall share count. When a business is profitable, this means earnings per share (EPS) are higher, and that's reason for the stock to go up. I wouldn't be surprised if the stock beat the market over the next couple of years as a result.
But in practice, aggressively buying back stock right now could be dangerous. Remember: Bed Bath & Beyond just started its expensive turnaround, and there's no guarantee it will work. The company's plan hinges on its ability to grow sales and retain high gross-profit margins, which is not a foregone conclusion. If the turnaround is unsuccessful or if it takes longer than planned, the company could find itself with depleted resources and in need of a new strategy.
For this reason, Bed Bath & Beyond is not a stock I would be comfortable betting on right now. I need more signs the turnaround is actually working.