The last four years have been extremely difficult for shareholders of Bed Bath & Beyond Inc. (BBBY, Financial). Since early 2015, the stock has lost more than 80% of its value as the retailer has struggled to adapt to a changing environment in which online sales from competitors like Amazon (AMZN, Financial) are disrupting traditional business models.
After years of disappointing results, it seems as if investors have had enough. An activist trio consisting of Legion Partners Asset Management, Macellum Advisors and Ancora Advisors are reportedly launching a bid to oust all 12 members of the board as well as CEO Steven Temares, who has been at the helm since 2003. The group collectively controls just 5% of Bed Bath & Beyond’s equity, but the market has responded extremely positively to the news, with the stock up 20% compared to yesterday. Can they make a difference?
Falling sales, eroding margins
To answer this question, we must first look at what caused the stock to fall so far in the first place. Revenue has been essentially stagnant over the last several years, while margins and profits have fallen. Earnings per share has declined significantly, from $4.58 in 2016 to $3.12 in 2017 and $2.28 in 2018.
Bed Bath & Beyond does generate a healthy amount of free cash flow, but concerningly, this has not gone toward paying down the debt load. Indeed, management has instead been increasing the dividend payout to shareholders - from 12.5 cents in 2016 to 15 cents in 2017 and 16 cents in 2018.
Returning cash to shareholders is, of course, not in and of itself a bad thing, but not in a context where the core business is suffering. To make matters worse, management has spent more than $2.7 billion on share buybacks since 2015, which is more than the entire market capitalization of the company (which, even after today’s price spike, stands at just $2.32 billion).
Can the company be salvaged?
Bearing all of this in mind, it is unsurprising that investors have grown restless. If the activist group is able to push the current leadership out, or at least force some changes, could Bed Bath & Beyond be turned around? Apart from managing the debt load, the most important strategic initiative for any new executive should be tackling the e-commerce side of the retail equation.
Amazon obviously presents a huge problem for almost all retailers, but some have adapted to this new world better than others. Large retailers like Walmart (WMT, Financial) and Target (TGT, Financial) have managed to simultaneously develop robust e-commerce platforms and adapt their existing brick-and-mortar locations to complement online sales by offering order-to-store and pick up-at-store options. It won’t be easy, but that is what needs to be done at Bed Bath & Beyond to justify today’s excitement.
Conclusion
Shareholders of Bed Bath & Beyond have been through a whole lot of pain, and there is no guarantee it is anywhere near over. But if there is a way forward, it must begin with a shakeup at the highest level of the company.
Disclosure: The author owns no stocks mentioned.
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