What will help Bed Bath & Beyond?

Investors in Bed Bath & Beyond Inc are betting that an activist intervention will add up to big gains. Shares in the retailer rose as much as 86%, the most ever, in early trading after Ryan Cohen, a co-founder of Chewy Inc and the chairman of GameStop Corp, disclosed that he had taken a 9.8% stake. Cohen’s investment company RC Ventures also called for the retailer to spin out its baby division, Buybuy Baby, or else put the company itself up for sale.
Bed Bath & Beyond has struggled to turn around its fortunes, even after a three-year strategic blueprint unveiled in 2020 — and despite its meme-stock status. The share price move implies that the company will agree to Cohen’s proposals, execute them perfectly and translate them into a superior performance. But the odds of all this happening are slim.
There is no doubt that Bed Bath & Beyond would benefit from a fresh approach. Chief Executive Officer Mark Tritton has been trying to do an awful lot, including bolstering online sales, closing and revamping stores, launching private labels and modernising the company’s supply chain.
During the pandemic this started to pay off, with the group reporting its first increase in same-store sales in almost four years. Nevertheless, in September and again in January, crushed by supply chain snarl-ups and higher freight costs, the company issued profit warnings. One crippling problem, for example, was that it could not get enough paper for its printed circulars.
At the same time, Bed Bath & Beyond is reaching the end of a plan to return $1 billion to shareholders. Clearly, these funds would have been better spent investing in the business.
Cohen’s calls for change should be considered. Spinning off the baby business makes sense because it is a separate division, not the e-commerce arm of the main business, so a split would not risk damaging the consumer experience. Cohen argues that the baby business could be valued at several billion dollars, more than the market capitalisation of the whole group. Analysts at Morgan Stanley and Wedbush say that estimate is too high. But even if the division fetched less than Cohen predicts, Buybuy Baby and the core chain would benefit from individual focus. Managing the two simplified businesses would be easier and should bring better results.
An alternative route Cohen is also proposing is to sell the group in its current form to a well-capitalised private equity group. Any buyer would need to invest significantly in the core business.
Meanwhile, inflation is poised to crimp overall consumer spending, and the mid-market, where Bed Bath & Beyond operates, is particularly vulnerable. That might make it difficult to find a buyer willing to pay the “substantial premium” that Cohen envisages.
That said, the takeover battle for Kohl’s Corp, which set out its own strategic plan, suggests that mid-market retailers still have attractions for acquirers. So perhaps in this case throwing out the baby and the bath may be no bad thing.

—Bloomberg