Summary
- Abrupt departure of C-suite executives was cheered by the market, as BBBY shares rallied 11%.
- Expect a turnaround plan in 2020, though the new CEO, Mark Tritton, may choose to form an explorative committee first.
- Digital versus physical store balance is crucial for Bed, Bath & Beyond.
Basic Business / Product Analysis
Bed Bath & Beyond (BBBY) is a retailer that focuses on domestic merchandise and home furnishings. The company operates under the brand names of Bed Bath & Beyond, Harmon or Harmon Face Values, Christmas Tree Shops, and Cost Plus World Market, to name a few. There is a total of 1,500+ stores worldwide, in addition to a number of websites and interactive platforms.
Valuation
We believe that in the aftermath of leadership changes, the PE multiple of 10x is appropriate for the 2020 EPS of $2.11, which translates into the target price of $21.
What Happened and What Are the Implications
Abrupt Departure of C-Suite Executives: On December 17, Bed, Bath, and Beyond a departure of six (!) senior executives, including chief digital officer, chief merchandising officer, and chief marketing officer. Three of the six had a 20+ year tenure with the company. This abrupt move takes place just a few weeks after the new Chief Executive Officer, Mark Tritton, assumed his role, making him a very likely driving force behind these sudden changes.
A Possible Culture Shock: Mr. Tritton was a C-suite executive at Target, before transitioning to Bed, Bath, and Beyond, in addition to working at Nike and Nordstrom. The departure of nearly entire senior leadership signifies a meaningful culture clash and a likely significant directional turn for the company. Without doubt, such a move had to be approved by the Board, which means that there is a solid degree of unity in place for the changes that are possibly imminent.
Strong Upside in Shares: BBBY shares rallied 11%+ on prospective turnaround plans, though no specific plans were unveiled and no announcement regarding the timing was made. However, since marketing and digital executives were let go, among others, we can surmise that there will be meaningful changes in those areas, and possibly others. We also believe that prospective changes will target the top line, not the bottom line cost savings.
Digital v. Brick-and Mortar Store Balance: Like Target, BBBY must achieve a proper balance between the online business and the physical store locations. In doing so, the company should balance marketing expenses versus real estate costs, while making sure that the digital business is not cannibalizing the brick-and-mortar sales. Target has been a success story from that perspective, while Bed, Bath, and Beyond has struggled. The merchandise and the demand curve are different between the stores, however, which may make the turnaround at BBBY more complex.
Dividend Likely to Remain Unchanged in the Near-Term: Bed, Bath, and Beyond prides itself on a very generous dividend yield, at ~4.4%. However, in 2020, we expect the dividend stay the same, given that the company may channel free cash flows toward other sources, as the turnaround looms.
Expect More Color in January: With Bed, Bath, and Beyond expected to report 4Q earnings next month, we see two near-term scenarios. Mr. Tritton will either announce transformation plans then, or (more likely) he will form an exploratory committee to study various issues before any turnaround plan is adopted. Bold moves certainly make history, but any bold moves require good homework.
