The turnaround plan Bed Bath & Beyond (BBBY +0.00%) unveiled last week failed to impress investors, and its stock ended the week over 20% lower than where it began.
The broad market indexes also took a drubbing, having their worst week since the pandemic was declared in March. This beating also played a role in the home-goods retailer's performance. Investors were less than enthused about the three-year blueprint to close and remodel stores, overhaul its supply chain, and buy back stock.
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Not the best deal in town
What may not have sat well with investors was the buyback portion of the plan. Bed Bath & Beyond said it was accelerating the repurchase of $225 million worth of stock as part of a three-year program to buy back up to $675 million in shares.
Even after having lost a fifth of their value last week, Bed Bath & Beyond's stock is still up nearly 500% from the lows it hit in March, and shares are even 15% higher than where they began 2020. The market might be thinking there was a lost opportunity to reacquire shares at a greatly discounted price earlier on.
Of course, Bed Bath & Beyond put its share-repurchase program on hold during the pandemic, a smart move because of the great uncertainty that surrounded the situation. Many other companies also did the same, as well as cutting their dividends or suspending them altogether, something the home goods retailer also did.
While those were prudent actions to take, the retailer's stock is not the bargain it was and may not be less going forward. Buybacks can have value if there's no better way for a company to invest in its business, but there are plenty of opportunities remaining with Bed Bath & Beyond, so it would be more a case of earnings-engineering at this point.
The payoff to come
The rest of Bed Bath & Beyond's plan looks more solid. It plans to close some 200 Bed Bath & Beyond stores by 2021 to generate $100 million in annualized earings before interest, taxation, depreciation, and amortization (EBITDA) savings while spending $250 million on remodeling 450 other stores, a group that represents 60% of its annual revenue.
That alone is expected to boost median sales 4% while delivering a double-digit return on the investment. The retailer also plans to build out its buybuy Baby chain as a means of increasing sales 50% to approximately $1.5 billion a year by 2023.
Other initiatives being deployed include spending $250 million overhauling the supply chain -- a move the company expects will make it faster, more competitive, and more responsive to market changes. It will also be spending a comparable amount modernizing its technology platforms.
The digital innovations already implemented helped Bed Bath & Beyond beat analyst expectations in the third quarter as online sales surged 89% from the year-ago period. The roadmap now includes a heavy focus on accelerating what it calls its digital-first, omni-always transformation plan.
Don't discount its ability to turn itself around
So does the plan, even with some apparent flaws the market finds distasteful, make Bed Bath & Beyond's stock a buy, particularly after the drop in value?
I'd say yes. CEO Mark Tritton, after just a year on the job, has already created a more vibrant retailer than it's been for the past few years. He's using consumer insights to take the home-goods business in a new direction and weaning its customers off of its discounting base. The ubiquitous 20%-off coupons will become a rare occurrence, meaning Bed Bath & Beyond's profitability should improve.
That won't be an easy task as consumers have been conditioned to only shop when coupons are available. Tritton can't do away with them overnight; if he does, the company will experience a collapse in sales similar to the one experienced by J.C. Penney when ex-CEO Ron Johnson eliminated the department store chain's doorbuster sales.
But it's a necessary transition the business needs to make for the long-term health of the company, and with more focus on private label goods also in the cards, the bottom line should benefit.
Bed Bath & Beyond is looking for all of these changes to provide "stable" comparable sales next year, which would be a welcome change.
On the right track
Although the retailer is not the screaming buy it may have appeared to be earlier this year, Bed Bath & Beyond's stock still trades at a fraction of its sales, and it goes for 13 times the free cash flow (FCF) it produces. That's a far cry from the four times FCF it went for during the depths of the pandemic, but it still represents a decent value.
The home-goods giant has its best shot now at truly recovering lost ground from years of neglect, making the pullback in its stock a buying opportunity.
