Shares in the home goods retailer trade at about $19. A year ago, they were at $14, before hitting a pandemic low of $4 in early April. I based my early call on the hiring of Australian Mark Tritton from Target (NYSE:TGT), where he had been chief merchandising officer.
Even with its recent run-up, and a pullback after analysts expressed skepticism about its plans, the stock is still cheap. We’re talking about a market cap of under $2.4 billion for a chain that should do $10 billion in business this year.
What the analysts didn’t like was Tritton’s plan to “de-clutter” the stores, cutting inventory.
To increase it, BBBY is closing 200 stores and cutting total inventory by $1 billion. Its Christmas Tree Shops and Linen Holdings businesses, along with a distribution business, were also sold for a total of $250 million. The Costs Plus World Market may also be sold. Some analysts think its BuyBuy Baby shops could be worth more than the rest of the company.
The new BBBY stores will be unlike the old ones. Those featured bargains on name-brand goods stacked to the ceiling, pushed with coupons and big sales. Coupons are ineffective, said Joe Harsig, whom Tritton recruited from Walgreens Boots Alliance (NYSE:WBA). Harsig also runs BBBY’s Harmon discount chain.
New chief digital officer Rafeh Masood, recruited from BJ’s Wholesale (NYSE:BJ), has already simplified the online checkout process. Elizabeth Meltzer, formerly with Gap Stores (NYSE:GPS) will take Tritton’s old merchandising role. She will be developing a new set of store brands which, like those of Target, stand on their own with a focus on quality.
Tritton has already achieved one goal, a profit of $218 million, $1.75 per share, on revenue of $2.69 billion for the quarter ending in August. Revenue nearly matched the pre-pandemic numbers of a year earlier, which included a loss of $1.12 per share.
Having gotten his team together and assured the stores’ survival, Tritton can now launch that turnaround plan. That starts with a focus on bed and bath products, aimed less at Walmart (NYSE:WMT) and Target than at niche brands like Buffy, Sheex. and Casper. The new store brands will be as good or better than the competition, but priced low and offered conveniently, in stores and online. By 2023, they could make up one-third of sales.
The new stores will feature “rooms” with complementary products. Sheets, pillows, and comforters that work together will sit together. There will be over 10 new store brands, with growth expected starting in 2023. Meanwhile, Arnal is buying back $225 million in stock to put a floor under that price.
The Bottom Line on BBBY Stock
BBBY now has a plan, it has a team, it’s making money and it is freed from the anchor of its real estate. One of Tritton’s first moves was to do a sale-leaseback on that.
A $2.3 billion price on even $10 billion in sales is reasonable. Deliver those sales with a profit and the stock could easily double from here.
It’s a long-term bet, a three to five-year proposition, but I think it makes sense.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn.