Beginning in late 2020, Chewy co-founder Ryan Cohen mounted a successful activist campaign at GameStop. Cohen ousted the struggling gaming retailer's management team, installed himself as chairman, and helped turn GameStop into the leading meme stock, driving huge share price gains.
Now, he has a new target: Bed Bath & Beyond (BBBY). Cohen's RC Ventures has taken a nearly 10% stake in the underperforming home furnishings specialist (which also owns the buybuy BABY chain). In a recent letter to the company's board, Cohen urged the retailer to consider several options for maximizing shareholder value. Let's see what this means for Bed Bath & Beyond and its shareholders.
What Cohen wants
At times during 2021, Bed Bath & Beyond was able to latch on to the meme stock craze, briefly lifting the stock above $50. However, the company's inconsistent performance -- particularly a recent sales slowdown and guidance cut -- doomed each of these rallies. As a result, Bed Bath & Beyond stock ended last week at $16.18, down from an all-time high around $80 reached in early 2014.
In his letter to the board, Cohen pointed to this long track record of poor share price performance to justify a major strategy overhaul. He offered four key suggestions:
- Create a more focused strategy by identifying the most critical strategic initiatives and delaying or scrapping less important parts of the company's turnaround plan;
- Try to sell or spin off the buybuy BABY chain;
- Evaluate a full sale of the business, potentially to a private equity firm; and
- Align executive compensation more closely with corporate performance.
However, the first suggestion seems like Monday-morning quarterbacking. In retrospect, Bed Bath & Beyond would have been better off had it prioritized supply chain and IT modernization -- key weaknesses that Cohen highlighted -- over its other strategic priorities. But management has already acknowledged this, and the company is working to complete these upgrades in 2022. Meanwhile, changes in executive compensation may be warranted, but on their own, they won't change the trajectory of Bed Bath & Beyond's business.
In short, Cohen's letter amounts to a call for Bed Bath & Beyond to engage in a sale process, either for the buybuy BABY banner or the entire company. This may not be a realistic plan, though.
Is M&A the answer?
In his letter to the board, Cohen opined that the buybuy BABY chain could be worth up to several billion dollars -- roughly double the entire company's recent market cap. That would make selling or spinning off the smaller baby-focused chain an attractive option. A sale would allow Bed Bath & Beyond to repay all of its debt and focus on turning around the core home business, while a spinoff would give shareholders a valuable asset that wouldn't be held back by the struggling home business.
That said, Cohen's argument that buybuy BABY could (or should) be valued like a pure-play e-commerce business seems farfetched. While the chain is growing, sales aren't much higher than pre-pandemic levels. Additionally, Bed Bath & Beyond doesn't disclose segment financial data for buybuy BABY, so Cohen's statement that the chain generates double-digit margins looks like unfounded speculation.
In any case, management's most recent guidance calls for adjusted EBITDA of $290 million to $310 million on sales of $7.9 billion in fiscal 2021. No matter how those profits are divided between the company's business segments, Bed Bath & Beyond's $2 billion-plus enterprise value already represents a generous valuation, barring a robust turnaround.
Image source: Author.
Meanwhile, Bed Bath & Beyond's weak profitability makes a full sale impractical at the moment. Private equity firms rely on debt financing to buy companies, and Bed Bath & Beyond already has too much debt relative to its earnings power. (That's why its long-term debt trades at yields of around 7%.) Selling the company would only be possible if Bed Bath & Beyond's results improve first.
Don't chase this stock
Bed Bath & Beyond stock soared 34% on Monday, after Cohen's investment and suggestions became public. However, investors shouldn't get greedy.
After the stock's recent surge, Bed Bath & Beyond's market cap likely sits around $1.7 billion, assuming the company repurchased $275 million of stock last quarter as planned. Merely selling or spinning off buybuy BABY won't be enough to justify that share price: Bed Bath & Beyond would need to turn its core business around.
Some of Bed Bath & Beyond's recent struggles could probably be written off as temporary. But the home furnishings retailer has consistently posted weaker sales than peers. Unless management stems these market share declines, growing the company's earnings will be nearly impossible. As such, investors should wait for evidence that management's turnaround is working before considering buying Bed Bath & Beyond stock.
