Last week, Bed Bath & Beyond (BBBY +0.00%) made a slew of announcements. Most notably, it told investors that it plans to complete its previously announced $1 billion share repurchase program by the end of fiscal 2021.
This move helped trigger a short squeeze, sending Bed Bath & Beyond stock up as much as 85% in after-hours trading on Tuesday. While the stock subsequently gave back some of those gains, it still rose 61% for the week.
Bed Bath & Beyond stock performance, data by YCharts.
Yet while Bed Bath & Beyond has been retooling its business for the past two years under new CEO Mark Tritton, big share buybacks have become its go-to strategy for pleasing shareholders. That may not end well for the company.
Underlying performance remains weak
In late September, Bed Bath & Beyond reported dreadful results for the second quarter of its 2021 fiscal year. Total sales in the company's core retail banners fell 11% year over year to $1.99 billion, missing its guidance range of $2.04 billion to $2.08 billion. Gross margin also fell short of management's expectations, causing adjusted earnings per share (EPS) to plummet 92% year over year to just $0.04. Analysts had expected EPS of $0.52.
Bed Bath & Beyond blamed its poor performance on a big slowdown in customer traffic in August (the final month of the quarter) and surging supply chain costs. Moreover, Tritton warned investors that both of those challenges had continued into September (the first month of the third fiscal quarter).
As a result, Bed Bath & Beyond slashed its full-year guidance. It now expects net sales between $8.1 billion and $8.3 billion, compared to sales of $9 billion for its core banners in fiscal 2019. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will range between $425 million and $465 million: down from a prior estimate of $520 million to $540 million. Meanwhile, management cut its adjusted EPS forecast to $0.70-$1.10 from $1.40-$1.55 previously.
For the third quarter, Bed Bath & Beyond expects to report sales between $1.96 billion and $2 billion -- down from $2.19 billion a year ago -- and EPS between breakeven and $0.05. And the company is counting on a big improvement in sales trends in November to achieve its guidance.
Image source: Bed Bath & Beyond.
Buybacks galore
Share buybacks were a core part of the financial strategy that Bed Bath & Beyond revealed at its investor day in late 2020. At that time, the company announced a $225 million accelerated share repurchase and planned to buy back an additional $450 million of stock between fiscal 2021 and fiscal 2023.
Bed Bath & Beyond's buyback plans have become increasingly ambitious since then. The company expanded its total share repurchase target to $825 million in January and $1 billion in April. And on Tuesday, Bed Bath & Beyond said it now plans to complete the full $1 billion buyback program by the end of this fiscal year: two years ahead of the previous schedule. This translates to roughly $400 million of buybacks in the second half of fiscal 2021.
On the one hand, Bed Bath & Beyond has plenty of cash available: It ended Q2 with about $1 billion of cash and investments. On the other hand, it paid an average of about $25 per share for the first $600 million of stock it bought back: above the current market price. Moreover, Bed Bath & Beyond stock trades for about 25 times the midpoint of its fiscal 2021 EPS guidance. At that valuation, management could be overpaying again by repurchasing stock now.
How about some turnaround progress first?
There's nothing inherently wrong with companies using excess cash to repurchase stock. But Bed Bath & Beyond is buying more and more stock despite deteriorating business fundamentals. The company's projected fiscal 2021 adjusted EBITDA of $425 million to $465 million marks a steep decline compared to fiscal 2018 -- the last full year before its management transition -- when adjusted EBITDA exceeded $700 million.
Bed Bath & Beyond normalized income (annual), data by YCharts.
Making matters worse, Bed Bath & Beyond is posting these weak results despite a buoyant home furnishings market. In August (when the retailer's foot traffic apparently plunged), sales at U.S. furniture and home furnishings stores jumped 18.4% compared to August 2019.
To be fair, Bed Bath & Beyond's turnaround initiatives haven't had much time to pay off yet. But eventually the tide will go out for home furnishings retailers. That macroeconomic headwind could more than offset any benefits from the company's turnaround strategy, driving further EBITDA declines.
If there were real proof of a recovery in Bed Bath & Beyond's business, aggressive share repurchases might make sense. For now, though, the turnaround hasn't gained traction. Buying back stock will weaken the company's balance sheet, leaving it with less flexibility to change course if management's current strategy doesn't pay off.
