It's been well overdue for Bed Bath & Beyond (BBBY) executives to face pressure from an activist investor.
And a colossal $0.13 earnings miss in the most recent quarter serves as the latest example why. When a company falls this short, coupled with a not so thinly veiled longer-term profit warning on the earnings call, it signals something (or many things) is fundamental wrong.
In the case of Bed Bath & Beyond yes, it's operating in a retail industry that is literally changing by the second. Not only are companies such as Walmart (WMT) and Target (TGT) selling more housewares, but they are doing so at prices that are better than Bed Bath & Beyond. Bed Bath & Beyond may sell higher quality goods, but the marginal buyer will gravitate to the cheap price on towels from the major discounters or even J.C. Penney (JCP) .
As a result of the competitive pressure and shift to online shopping, Bed Bath & Beyond is being forced to make investments in new services, enhanced product and online infrastructure. That is turning into a Catch 22, as fewer people are visiting its stores. Just check out how the fundamental changes in retail are weighing on Bed Bath & Beyond:
- Same-store sales have declined in four of the past five quarters, despite people spending more to renovate homes that are likely rising in value.
- Return on invested capital reached 18.82% in the most recent quarter, down sharply from a peak of 25.6% in fiscal year 2013.
- The company's third fiscal quarter gross profit margin was 36.97%. It was above 42% over 10 years ago.
- Operating profit margins reached 7.15% in the quarter, compared to over 15% some 10 years ago.
Hence, Bed Bath & Beyond, which continues to open new stores and buy back stock in the face of its troubles, has seen its stock fall 21% over the past five years. The S&P 500 has risen 80% during that span. Williams Sonoma WSM is up 40%, Target has tacked on 50%. In addition to a sustained period of flagging performance that should serve to attract an activist, Bed Bath & Beyond has a few other issues that warrant fresh thinking from an outside party.
There are no quarterly or annual breakdowns on the company's business segments. Should Bed, Bath & Beyond be operating a store called "The Christmas Shop" year round? Who knows, as the trends of the business are not being shared. Did the purchase of One's King Lane make sense? Who knows. Bed Bath & Beyond continues to tout its strong online sales growth, but is the business profitable? If so, what do the profit margins look like?
The company's co-founders (who are 85 and 79 years old) continue to serve in co-chairman capacities. They oversee a CEO who has been at the helm since 2003 and has been a director since 1999. The reluctance to slow things down in terms of opening new stores and buying back stock in the face of weakening operating results is very disturbing, and a clear signal of entrenched management and a cushy board relationship.
Speaking of board of directors, given the size and growing complexity of Bed Bath & Beyond, its board composition is a joke. Further, there is a dearth of retail experience during a period of major industry disruption. Three spots on the 10-member board are held by two co-founders and one long-time CEO.
Here is a breakdown of the resume of the other seven people:
- Dean S. Adler, 59, is a Co-Founder and Chief Executive Officer of Lubert-Adler Partners, L.P., a private real estate investment firm. Director since 2001.
- Stanley F. Barshay, 76, is a former Merck (MRK) executive. Director since 2003.
- Geraldine T. Elliott, 59, is retired Executive Vice President, Strategic Advisor at Juniper Networks. She also spent time at Microsoft (MSFT) and IBM (IBM) Director since 2014.
- Klaus Pepper, 85, has been a pensioned partner in the law firm of Proskauer Rose LLP, counsel to the company, since 2001. Director since 1992. You are kidding here, Bed Bath & Beyond, right?
- Patrick Gaston, 58, is Chief Executive Officer of Gaston Consulting. He spent a year as a senior advisor to the Clinton Bush Haiti Fund and a good chunk of time at Verizon (VZ) Director since 2007.
- Jordan Heller, 55, has been President of Heller Wealth Advisors. At least he is also on the board of Equity One, a shopping center developer.
- Victoria A. Morrison, 63, has been the Executive Vice President & General Counsel of Edison Properties. Director since 2001.