Bed Bath & Beyond (NASDAQ:BBBY) will announce second-quarter results in a little over a week. BBBY stock has lost more than 45% over the past year through September 20.
Over the past 15 years, Bed Bath & Beyond’s annual total return is down more than 7.5%. Things have gotten so bad the battered retailer has seen its gross margins drop for 12 consecutive quarters.
As a result of its collapsing business, long-time CEO, Steven Temares, was forced to resign in mid-May, as activist investors pushed for change. On an interim basis, board member Mary Winston was appointed as interim CEO. Winston’s got experience in the retail industry.
A Four-Point Plan
Winston’s four-point plan to turnaround the company includes possible asset sales. To that end, it’s hired Goldman Sachs (NYSE:GS) as a financial adviser. Goldman Sachs will review all offers for the business including any to buy the entire company.
In the first quarter, BBBY had to take a non-cash impairment charge of $401 million, which was on top of a non-cash impairment charge of more than $500 million, all related to its North American retail business.
The activists pushing for change at the retailer, believe management has cost owners of Bed Bath & Beyond stock more than $8 billion of the past few years. They estimate BBBY could generate $1.4 billion by selling everything other than its 995 Bed Bath & Beyond stores.
In addition to the possible asset sales, Winston’s plan includes refreshing as many as 160 Bed Bath & Beyond stores ahead of holidays, to go along with a longer-term comprehensive store renovation program to drive top-line sales.
In addition, the company is in the middle of resetting its cost structure, which includes short-term cost-cutting through headcount reductions, etc. Long-term, it plans to change how it sources and buys in order to increase the number of private-label offerings it sells. Over the next 2-3 years, it expects to generate significant cost savings, leading to higher profits.
Lastly, over the past few months, while undertaking an ongoing CEO search, BBBY has managed to bring nine independent directors to the board, who have the experience necessary to drive the company to the next level.
A Plan to Save BBBY Stock
The problem with Winston’s plan is that it’s hard to know whether any of this will make a difference to customers who’ve left for competitors such as Walmart (NYSE:WMT), Target (NYSE:TGT), TJX (NYSE:TJX) and even Amazon (NASDAQ:AMZN).
The four retailers mentioned above have an average total return of 33.8% year to date through September 20, considerably better than BBBY stock, which is down 8.8% in the same period.
So, the question is whether buying BBBY stock at less than $10, is a smart move, catching BBBY just before it takes off to $20, or a really dumb move that sees its shares revisit its 52-week low of $7.31, a price in mid-August.
If you do a quick Altman Z-Score calculation, you get 3.90, which suggests that it’s still got a very sound balance sheet despite the negative sales growth and GAAP losses it’s experienced in the past few quarters.
| Bed Bath & BeyondAltman Z-Score | |
| Working Capital | 1,266,010,000 |
| Total Assets | 7,988,195,000 |
| Retained Earnings | 10,679,515,000 |
| EBIT | 340,000,000 |
| Market Cap | 1,270,000,000 |
| Total Liabilities | 5,926,201,000 |
| Net Sales | 11,850,000,000 |
Sources: Balance Sheet, Income Statement
Calculation = 1.2 (working capital / total assets) + 1.4 (retained earnings / total assets) + 3.3 (earnings before interest and tax / total assets) + 0.6 (market value of equity / total liabilities) + 1.0 (sales / total assets)
Should it continue to generate goodwill and tradename impairments in the second quarter and subsequent quarters, Bed Bath & Beyond’s Altman Z-Score would likely drop below 1.80, which suggests bankruptcy could be in its future.
Whomever Winston hires as the full-time CEO is going to have to work quickly to stem the bleeding.
The Bottom Line on BBBY Stock
I believe it is but only for aggressive investors who can afford to lose their entire investment.
Bed Bath & Beyond has been slow to react to the changing retail world and only a top-notch CEO is going to be able to right the ship.
I have no idea who might be available that can get the job done, so it’s entirely possible that the board will decide to make Winston the permanent CEO, given she’s already started the heavy lifting.
At $7.50, Bed Bath & Beyond was a smart buy. At almost $10, the margin of safety is considerably less.
That said, those comfortable taking a flyer, might want to pick up a few shares.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
