Bed Bath & Beyond, Moving Too Slow, Warring with Activist Investors

TL;DR

Bed Bath & Beyond is struggling. Sensing an opportunity to improve their shares, an activist investor group has chimed in. I think the company’s response is weak, and getting weaker by the minute. Time is on the side of the activists. The market seems to agree as the stock exploded by 25% after this fight was announced.

I expect big changes at the company.

What is Bed, Bath & Beyond’s situation?

Their business is not in great shape. Even the current management admits it needs to transform. At present, they are in a war of sorts with a group of activist investors

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Who is the activist investor, and what is their track record?

  • Legion Partners Holdings

  • Macellum Advisors

  • Ancora Advsiors

All told, these investors own 5% of common stock. They have a long history doing this sort of thing. More recently, Legion went after Papa John’s Pizza, telling them to get back to their pizza and away from controversy. Who knew good pizza could be the cause of a fight?

Legion has a pretty good track record of getting change from the companies that they go after. At a high level, activist investors are significant shareholders in a business that are looking to maximize their return. They target companies that have some kind of weakness and they believe would be responsive to pressure so that all shareholders (particularly the biggest ones!) would benefit.

What does the activist investor want from Bed Bath?

The investor has published a press release outlining their demands, which I reviewed.

Here is the high-level summary:

  • Elect an experienced Board, who will first hire a CEO to turn the company around.

  • Implement a plan in the coming weeks and months, developed by the potential new Board members.

What does the activist investor say is wrong?

  • Revenue and margins are declining. Stock price is declining. $8B in value destruction over the past 15 years.

  • Failed strategy and execution has not enabled them to keep up with retail. 0.1% CAGR the last 5 years.

  • CEO and executive team only out to enrich themselves. They really harp on how much they are benefiting while the company flounders. It makes the best press!

  • No private label program to enhance margins.

  • No strategy beyond discounting and promotions to get buyers into the store.

  • Repeated talk about strategy with no execution follow-through. Several examples of strategies from private label to furniture & home decor, etc.

Let’s be clear — the investor group says the company is WAY off track, and demands a total management “reboot”.

What is management doing?

Management has issued their own press release, outlining their path. It’s a war of press releases, folks! Here’s what it has to say.

  • Activist investors are acting in bad faith, and there have been efforts to refresh the Board, pointing to the fact that 3 directors are new in the last few years.

  • Company is doing a big transformation already. To quote Monty Python: “We’ve already got one.”

I’m not sympathetic to this message. Bed Bath & Beyond is in a fight for its life. The response does not clearly diagnose the company’s issues. That’s the biggest problem I have. Why are we in this situation to begin with? More decisive leadership seems to be needed. The big challenge companies have is often when they are in this situation, it is almost already too late.

Who’s right?

Look, Bed Bath has underperformed the market. This is undeniable. This new activist investor plan could help the company, or it could destroy even more value because management turnover is never easy to navigate.

This isn’t a matter of right or wrong. But if I had to bet my life savings on one outcome, I would vote for dramatic changes rather than incremental changes in this situation. Perhaps the entire Board and management team doesn’t need to reboot, but the concerns of the activist investors are real and deserve real discussion.

businessRick Watson