Real turnaround stories are rare. When a company is struggling, it needs to have enough cash to stay solvent while working out its problems, and then, it needs to climb uphill, often in the face of tough challenges.
Bed Bath & Beyond (BBBY) was in a difficult position in 2019 after an extended revenue slump and no real strategy forward. Activist investors ousted management and brought on Mark Tritton as CEO, who was previously merchandising chief at Target. He began to set in motion a turnaround, and coming out of the pandemic, the home goods company is in a better position than it has been in for years. Should you buy shares of Bed Bath & Beyond in these early stages of its recovery?
Image source: Getty Images.
New management, new strategies, new challenges
Tritton joined the company at the end of 2019 to clean things up, and he revamped the management team, bringing in new talent and creating new positions such as chief strategy and transformation officer. Operational changes took some time to implement, but management accelerated strategic developments when the pandemic arrived to expand digital access and stay afloat while the company's physical stores were closed.
This was combined with a broad tailwind for the home improvement industry, and the home-goods retailer posted year-over-year comparable-sales growth of 6% in its fiscal 2020 second quarter (the three months ended Aug. 29, 2020). This was the first quarter of comps growth in almost four years, and the company went on to deliver positive comps in the fiscal third and fourth quarters too. At the same time, Bed Bath & Beyond reduced its debt and strengthened its cash position. The new digital operation played a large role in these achievements:
| Metric (for Fiscal 2020) | Q2 | Q3 | Q4 |
|---|---|---|---|
| Total comps growth | 6% | 2% | 4% |
| Digital comps growth | 89% | 77% | 86% |
Data source: Bed Bath & Beyond quarterly reports.
The core Bed Bath & Beyond brand outperformed the company total with more than 90% digital comps growth in the third and fourth quarters. Profitability also improved over the same period, and its adjusted EBITDA margin expanded 160 basis points in the fiscal fourth quarter to 6.4%.
Beefing up digital and cutting down physical
A major component of the company's growth strategy is modernizing its digital capabilities. The foundation of this plan involves moving core tech infrastructure to the cloud, which can support greater agility and more omnichannel options. The company has made headway in this direction, and investments in an improved digital program are the key to the recovery's momentum.
But part of becoming leaner and more nimble is reducing debt and getting rid of dead weight, which the company is also doing. Tritton said the company would close 200 stores, mostly under the flagship banner. It also sold or closed five brands in 2020 to focus on its core holdings.
Another exciting development is the creation of owned brands, a strategy Tritton successfully implemented at Target. Bed Bath & Beyond also appears to be following Target's strategy of leveraging in-store order fulfillment with 37% of digital revenue being handled by its stores in the fiscal fourth quarter.
Has it turned around?
Bed Bath & Beyond is on an upward trajectory, and Tritton has demonstrated that he can take bold and decisive actions. But as people emerge from lockdowns and the surge in demand for home improvement projects tapers off, the company will face uncertainty in this changing environment.
Management is projecting a 40% sales increase in the fiscal 2021 first quarter, but that's not meaningful considering the widespread store closures in the year-ago quarter. Bed Bath & Beyond's share price fell after the latest earnings report, because investors were disappointed the company reaffirmed -- but didn't raise -- its outlook.
There are still a lot of moving parts in this story. Private brands can help it gain market share in value-oriented categories, but its competing against deep-pocketed rivals. Target has a value home category and lots of foot traffic, in addition to one of the strongest omnichannel programs, and the TJX Companies operates Home Goods, another leader in the value category.
On the other end of the spectrum, the company's upmarket offerings will compete with companies such as RH and Williams-Sonoma, both of which have established a strong brand identity, digital capabilities, and a track record of growth during the pandemic.
Bed Bath & Beyond is still in the early innings of its transformation, but with its new leadership and early wins, investors should be more optimistic than they have been in years. Even so, the stock remains a risky play.
