Articles tagged as

Bed Bath & Beyond

  • Signal from Noise
Nov 13, 2019

-Hated stock; years of poor results, negative s/s sales; appears a victim of Amazon -Still popular brand; activists and new CEO instilling new retailing culture; lots of value -Bad news discounted; cost cuts, store closings, modern approach could double price In decades covering Wall Street, I don’t think I’ve seen a stock as hated as Bed Bath & Beyond (BBBY), the beleaguered home goods retailer—except for Best Buy (BBY). That’s relevant, as I’ll show below. To call it a dog stock would be an insult to canines the world over. Yet hated stocks are particularly interesting when the problem has been mainly unimaginative management, but especially where the short position is over 50% of the float, as in BBBY.  If the shorts are wrong the stock could rise substantially. BBBY stores and brands are well known. In a recent Yougov survey it was the eighth most popular specialty retailer, ahead of CVS and Ikea. Many investors know this $1.7 billion market cap retailer has struggled mightily for years, missing EPS expectations quarter after quarter and posting continual negative same-store sales (-6.7% in the second quarter ended August). Consequently, the stock price has plunged to a low of $7.40 recently from $80 in 2015. It’s rebounded to $13.60 when a new CEO came aboard last month. I’ll get to that, too. There are problems aplenty and space limits me to the most egregious: BBBY is late to the online challenge, with a weak Internet strategy; prices are too high, requiring constant couponing; high SG&A costs; too many stores in the U.S. and not enough customers.  Activists who got involved last March accused previous management of too high compensation, and self-dealing regarding some BBBY acquisitions from related parties. Sentiment is poor; just 25% of the Wall Street analysts who follow it rate it Buy. Yet, it seems that most of the bad news is in the price. Contrary to the bear case, BBBY’s problems, though deep, are fixable. Bears say BBBY is a dead retailer walking because its products are particularly susceptible to the “retail apocalypse” of Internet sales and Amazon (AMZN). But if that were true why then is home décor rival Williams-Sonoma doing well, and why has BBBY’s sales remained relatively steady at about $12 billion over the past five years, even as annual EBITDA has more than halved to about $750 million over that time? Years ago Best Buy (BBY), once derisively called Amazon’s show room, was thought dead, but through some imaginative retailing by a new CEO it has come roaring back, with much improved results and a sevenfold increase in price, after dropping 80% previously. One important BBBY catalyst has already arrived, activist hedge funds Legion Partners,  Macellum Capital and Ancora Partners, which hold about 5% of the stock and have an established turnaround track record. They helped push previous management into retirement, revamped the board with independent directors, and aided in the hiring of a potentially brilliant choice for a new CEO, Mark Tritton, formerly Target’s (TGT) chief merchandising officer. Target is one of the few general retailers thriving in the age of Amazon. Expect Tritton to instill that culture at BBBY.  He doesn’t have to reinvent retailing just put in modern practices already adopted by peers.  There are significant changes coming that should lead to improved results, and I expect the stock price will reflect that. For starters, BBBY is cutting 7% of staff, slashing inventory by some $1 billion, and closing 60 underperforming stores, out of about 1000 or so. Expect more of that. This should allow BBBY to price competitively against Amazon. SG&A as a percent of sales soared to 30.6% of sales in fiscal 2018 from about 25% seven years before, but every 1% cut translates into roughly 50 cents of EPS. BBBY owns other brands, such as buybuyBaby, World Market and Christmas Tree Shop, amounting to several hundred stores. It’s also possible BBBY will divest itself of some or all these non-core brands with a relatively low hit to EBITDA. A recent Wedbush Securities broker report valued those assets at $1.7 billion, equivalent to BBBY’s current market cap, so the market would appear to be giving little or no value to the main brand. BBBY holds about $1 billion in cash and marketable securities (or $7.75 per share). That compares to $1.5 billion in long term debt and $1.8 billion in operating leases, as well as $1.7 billion in property, plant and equipment assets.  According to a recent report from Bloomberg, some 400 leases are up for renewal in the next few years. New Constructs, an independent forensic accounting investment research firm, notes that BBBY’s return on invested capital (ROIC) has fallen to about 5%-6% from a robust 17% in 2014, even as 117 other retailers have managed to increase theirs over the same period. (So much for the “retail Apocalypse.”) BBBY’s problems appear company specific, which means they can be fixed. Getting ROIC right is important and if BBBY were to match Williams-Sonoma’s 13% ROIC, the stock would be worth $107, argues New Constructs. See table. Even with its troubles, BBBY’s ten-year ROIC average is 15%.  Those are big numbers, but if ROIC rose less, the stock could still rise substantially. Currently, BBBY trades at a price/earnings ratio of 7 times fiscal 2021 (ending Feb. 2021) EPS estimates of $1.93.  BBBY has guided to about $2 EPS for fiscal 2020, ending next February. The activists assert BBBY can earn over $5 EPS in 2022, but again if it were $3 EPS, with a slightly expanded P/E, the shares could be worth $24-$27, roughly a double from here. New Construct points out Best Buy’s ROIC rebounded to 16% from 7% in 2012 and has done enormously well: “BBBY has become so cheap that the potential upside, even with slight operational improvement, is enormous.”  Don’t forget a short squeeze is possible. And there’s also a 5% dividend yield while you wait. Where Could I Be Wrong: If Tritton fails to turn it around, BBBY shares could return to lows. There is downside protection in the form of potential acquisition interest. Bottom Line: Wall Street doesn’t believe there’s any hope and I take solace from that. A turnaround is a process but two years from now, if Tritton is successful, many will say it was obvious. 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