- A stock offering, stores closures, and staff layoffs are some of the initiatives in Bed Bath & Beyond's newly released turnaround plan.
- The plan did not please shareholders, which caused the stock to plummet more than 20% after the announcement.
- Keeping Buybuy Baby as part of Bed Bath & Beyond may not be a bad decision after all.
Why Did BBBY's Turnaround Plan Disappoint Investors?
Judging by the market's reaction, the turnaround plan proposed by Bed Bath & Beyond's (BBBY) - Get Free Report management was not what shareholders had been wanting to hear. The retailer's shares plummeted 26% after the big reveal.
There are several parts to the plan that met with disapproval.
First, the announcement of share dilution. For the purpose of repaying the company's debt and increasing, its liquidity, the home goods retailer announced the potential launch of an at-the-market offering program for up to 12 million shares of common stock.
Last quarter, Bed Bath & Beyond reported total debt of $3.27 billion and a debt-to-equity ratio of -23.47. This indicates that the company's liabilities exceed its assets.
According to Bloomberg, some suppliers have already paused shipments to Bed Bath & Beyond after the company delayed some payments.
Second, in order to optimize its cost structure, the company will close approximately 150 lower-producing Bed Bath & Beyond stores and lay off about 20% of its employees.
With these plans, the company aims to reduce selling, general, and administrative expenses by $250 million for fiscal 2022, compared to a previous forecast of $400 million.
It's worth noting that Bed Bath & Beyond generated about $18 million in cash from operations last year, while spending about $354 million on capital expenditures.
But even with the turnaround plan being put into practice, it is still expected that comparable sales will fall 26% over last year. For fiscal 2022, Bed Bath & Beyond expects comp sales to drop 20%.
Why Is Bed Bath & Beyond Keeping buybuy BABY?
Shareholders have been anticipating news about the fate of Bed Bath & Beyond's buybuy BABY business.
When he invested in the company, shareholder activist Ryan Cohen sent a letter to the Bed Bath & Beyond board with a series of recommendations, including a buybuy BABY spin-off.
He estimated that the business has a valuation in the billions of dollars — even larger than Bed Bath & Beyond's market cap. He wrote that spinning off the brand could reset the parent company's financial health.
"In the event Bed Bath pursued a full or partial sale of Baby, it could position itself to pay off debt, put cash on the balance sheet and continue reducing its share count, thereby creating significant value for shareholders. Spinning off shares of Baby would be an even more efficient way to transfer value to shareholders," Cohen wrote.
However, Bed Bath & Beyond's board of directors announced that, after a comprehensive review of Buybuy Baby, it determined that keeping it would add greater value to Bed Bath & Beyond's portfolio.
Still, the board left open the possibility of revisiting its value-creation positions in the future.
Can Bed Bath & Beyond Heal Itself?
Bed Bath & Beyond needs to take drastic measures to ward off the risk of bankruptcy. Even though it has plenty of faults, the turnaround plan has shown that the retailer is taking action to reverse the awful financial situation it's in.
The main question is whether management is acting too late. After all, Bed Bath & Beyond has been showing signs of decay in its business and its financial health for a long time.
But it should be noted that if Bed Bath & Beyond didn't have the support of retail investors, things could be a lot worse.
Recent meme rallies have sent the stock up nearly 100%, from a 52-week low of $4.38 per share in July to a current high of $9 per share. These rallies happened without any business-related news that would justify such an appreciation.
Remember that, on August 17, at the height of its meme rally, BBBY reached $23.08 per share.
It's inevitable that the company would use this "gift" from meme traders as a unique opportunity to raise cash, considering that its sales are going from bad to worse.
However, Bed Bath & Beyond still has one card up its sleeve: its buybuy BABY business. Considering a possible valuation as high as $1 billion for the banner, the company may have made a good choice in not yet selling the business — if the turnaround plan not turn out not to be a failure.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)