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Bed Bath & Beyond (BBBY) Catches Investors' Eye: Here's Why

Zacks Equity Research

Bed Bath & Beyond Inc. BBBY drew investors’ attention after activist investors expressed their intention to make major changes to the company’s board of directors. The stock went up as much as 22% on Mar 26. Per sources, activist investors including Legion Partners Asset Management LLC, Macellum Advisors GP LLC and Ancora Advisors LLC are working to oust all 12 members of the board.

Media reports also revealed that the group is likely to submit 16 nominees to take over the company's board at the Annual Meeting. The investor group wants to replace the company’s chief executive officer as well. The activist investor group owns a combined stake of 5% in the company. Per sources, the reason cited behind this major move is the failure of the current management team to keep up with the evolving retail scenario.

However, Bed Bath & Beyond responded to the activist investors by issuing a statement. The company notified that it is working in the best interest of its shareholders and had discussions with Legion and Macellum in the recent weeks. In fact, management also asked for better ideas and recommendations to enhance its business. Per management, they did not give any suggestions rather opted to attack the company publicly.

Moreover, the company stated that the board consistently assesses its composition, reflecting the right talent and expertise. Also, the board values the latest perspectives and diversity. As a result, three independent directors have joined Bed Bath & Beyond in the past two years and the company’s one-third directors are diverse, in sync with the board’s ongoing refreshment agenda.

Also, the company said that it is going through a comprehensive transformation to develop its foundational structure, boost shareholder value and position well in the long term. Moreover, Bed Bath & Beyond is progressing well with its efforts to become one of the best customer focused retailers.

On its third-quarter fiscal 2018’s conference call, Bed Bath & Beyond had stated that it is ahead of plan in relation to its long-term financial targets. The company’s long-term financial goals include moderating declines in operating profit and net earnings per share in fiscal 2018 and 2019. Moreover, the company expects to witness net earnings per share growth by fiscal 2020. Earnings per share are envisioned to be about $2.00 for fiscal 2018.

How is Bed Bath & Beyond Performing?

Bed Bath & Beyond is trying all means to adapt to the changing retail landscape, wherein the competition has intensified. However, the company is still struggling with dismal comparable store sales (comps) performance on account of lower store transactions. Comps dipped 1.8% in the third quarter of fiscal 2018 on a mid-single-digit decline in sales from stores, somewhat offset by robust sales at the customer-facing digital networks.

We note that comps slipped 0.6% in both the second and first quarter of fiscal 2018, and also in the fourth quarter of fiscal 2017. The metric fell 0.3%, 2.6% and 2% in the third, second and first quarters of fiscal 2017, respectively. In fact, comps are projected to decline about 1% in fiscal 2018.

Also, for fiscal 2019, management had earlier estimated comps to dwindle in a low-single-digit on lower store traffic.

Apart from a weak comps trend, Bed Bath & Beyond is battling margin pressures for quite some time now. Gross margin contracted 210 basis points (bps) in the fiscal third quarter, mainly due to lower merchandise margin coupled with higher coupon expenses. Lower gross margin coupled with higher SG&A expenses resulted in operating margin contraction of 300 bps in the last reported quarter.

Further, the company had projected gross margin deleverage for fiscal 2018, primarily on investments in the customer value proposition and the digital channels. Further, SG&A expenses are estimated to increase due to higher investments toward transformational efforts.

Dismal comps and strained margins trend are well reflected in Bed Bath & Beyond’s price performance. This Zacks Rank #4 (Sell) stock has lost 17.9% against the industry’s 25% rally in a year’s time.

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Canada Goose Holdings Inc. GOOS delivered average positive earnings surprise of 82.7% in the trailing four quarters. The company currently carries a Zacks Rank #2 (Buy).

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