Bed Bath & Beyond (BBBY) is up sharply this morning
(+27%) on a report from The Wall Street Journal that some activist investors
are preparing to launch a proxy fight to replace its entire 12-person board,
according to people familiar with the matter.
As investors who follow the retail space and BBBY specifically are aware, a frustrating aspect of BBBY is that it seems to always be in turnaround mode. The main problem facing the company’s operations is online competition from the likes of Amazon (AMZN) and others. Because BBBY's product catalog is well-suited to online purchasing, the company is particularly susceptible to digital competition.
The main focus with BBBY's current turnaround efforts is its prioritization of profitability above sales growth. It has been eliminating less profitable SKUs from its assortment, making adjustments to its free shipping thresholds (increased to $39 from $29), and modifying pricing algorithms, among other items. The company has also been rethinking its store format. BBBY is focusing on cleaner sight lines, less clutter, and better cross-merchandising. It has also identified as many as 40 stores that will become "working labs" as the company experiments with formats and layouts, seeking to optimize the customer experience and best serve the company’s updated merchandising strategies.
Another key strategy -- and we think this is a very good idea, and it's what Target (TGT) has been implementing with success -- is shifting its sales mix toward more proprietary products. BBBY is doing this mostly in decorative furnishings with its March 2019 launch of its Bee & Willow line, the first of six in-house decorative furnishing brands BBBY plans to introduce in 2019 and 2020. It includes a mix of modern farmhouse and cottage furnishings such as furniture, lighting, rugs, and wall decor.
In fairness, there were some glimmers of hope when BBBY reported Q3 (Nov) results in early January. Specifically, BBBY reaffirmed FY18 EPS guidance of approximately $2.00. After a big guide down the prior quarter, a reaffirmation was viewed as a positive. BBBY also said that FY19 EPS would be similar to that of FY18, implying approximately $2.00. That was well ahead of market expectations at the time.
According to the article, the activist investor group contends that BBBY has failed to adapt as consumers increasingly shop online. The retailer has allowed its costs to increase, resulting in shrinking margins over the past several years. The report indicates, citing people familiar with the matter, that the investor group wants the retailer to better curate its merchandise and to consider selling non-core brands such as Buy Buy Baby and Cost Plus World Market to focus on its core business. They also want it to replace CEO Steven Temares.
It's good to see activist investors taking an interest in BBBY, as the retailer pretty evidently needs to make some changes. It's good to see it be encouraged to focus more on proprietary brands and focusing more on profits. A change at the top probably makes sense as well. The current CEO has been at the helm since 2003, so perhaps some new leadership and vision could be good for the company.
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