Activist have come on vocally to shore up Bed Bath & Beyond's (BBBY) sustained slide, but so far solutions remain elusive.
Shares have declined substantially over the past few quarters and even further over the one year, five year, and even 10 year periods. An over 7% decline on Thursday after reporting disappointing earnings on Wednesday evening is not aiding this trend.
Amidst the declines in the longer term, an activist investor group comprised of Legion Partners, Macellum Capital Management and Ancora Advisors came on to shake up management and corporate strategy, issuing a scathing screed in late April.
"Historical performance demonstrates Bed Bath & Beyond's Board and management have failed shareholders," the group wrote. "We believe Bed Bath has enormous potential under new leadership - our goal is to reinvigorate Bed Bath and restore a winning culture."
The changes since have been swift, as within weeks of airing their grievances publicly former CEO Steven Temares exited the company and four new board members were named.
The latest quarterly report reveals that activist voices are being given attention, there are significant growing pains, especially as a focus on margins has severely pared down same store sales ala J. C. Penney (JCP) .
Still, the ability to create value either through a sale of the business, asset sales, or other methods under activist advisory, many still see a case for a proverbial light at the end of the tunnel.
"Under the pressure of activist investors, BBBY has made significant changes to its board. BBBY's board members now have an average tenure of ~one year (vs. ~19 years in February 2019, which at the time was the highest in our coverage)," Keybanc Capital Markets analyst Brad Thomas said. "Today, four out of 13 board members were sourced from the activist slate, including John Fleming, Sue Gove, Jeffrey Kirwan, and Joshua Schechter. We believe the new board can provide the fresh perspectives necessary to help BBBY accelerate its turnaround."
There remains the hurdle of naming a new CEO, but a more focused mind on the new landscape of the retail industry could be a key positive as well.
In the near term, interim CEO Mary Winston's outline of restructuring ahead has encouraged speculative interest in the stock at its severely depressed levels.
The near term highlighted tasks include a focus on stabilizing sales without sacrificing profits, which includes is popular coupon-heavy sales driver, resetting the cost structure, reviewing the asset base, and restructuring the administrative structure.
"These initiatives all appear appropriate, and an engaged Board and senior leadership team should be able to affect change," Wedbush analyst Seth Basham wrote of the plan. "That said, growing sales and gross margins simultaneously will be challenging-price increases, coupon restrictions, eliminating unprofitable SKUs may help support margins but will continue to weigh on sales, in our view."
Basham suggested that a possible sale of Buy Buy Baby and "other assets likely worth at most $7 per share" is keeping him neutral on the stock despite the persistent pain for shareholders.
The sale of assets would also add to the company's cash horde which has quizzically been used to promote a large buyback program and dividend payments while stores remain in need of refurbishing and the stock price continues to decline.
"While every penny is needed, the company still bought back $81 million in stock, or 5.3 million shares. This insane buyback has taken shares down from 224 million six years ago to 127 million now. Six years ago the stock was at $80. Now it is $11," Jim Cramer noted in his Thursday morning column. "That has to be the dumbest buyback in history and the fact that it was still going on this quarter is simply unbelievable to me."
He suggested this should be an easy fix for new management under activist pressure.
The balance sheet is a key strength for the company at the moment and supports the belief that activists have time to turn the ship around. A reduction in the loss-making buyback program could enhance that narrative and protects the current dividend.
Not all are convinced this is sustainable.
"The big question is just how to enhance? How to bring us back? The firm runs with cash and cash equivalents of $700 million, plus an additional $200 million in short-term investment," Real Money columnist Stephen Guilfoyle commented, highlighting the challenge ahead for the next CEO. "That's up against long-term debt of just under $1.5 billion. Total liabilities are rising faster than total assets."
That, of course, speaks to the larger task is modernizing the company and returning the share price to a level above where activists came aboard earlier this year, not easily done as both Target (TGT) and Amazon (AMZN) eat away at the core business.
While activists are not usually apt to accept a loss on their investment and shares are trading at a paltry five times forward earnings, suggesting that at the very least asset sales to turn a profit could offer value, getting a premium at this point may prove problematic.
"It's a tough road. Thank heavens they have some cash," Cramer concluded. "Whoever ends up as CEO here will have his or her hands filled to shrink the company and give it a raison d'etre before it withers away."
In any event, until that CEO is named, it's likely too early to get excited about buying any dip in Bed Bath & Beyond, no matter what the dividend.
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