Why an activism campaign at Bed Bath & Beyond was so long in coming

Originally appeared as part of Activism this week, March 29, 2019.

 

I’ve been told for as long as I can remember that retail is a graveyard for activists, and yet they keep coming back. Indeed, this week’s big campaign launch, at Bed Bath & Beyond, was a long time coming.

Bed Bath & Beyond was one of the first companies covered on Activist Insight Vulnerability, our predictive tool. Eight months ago, we ran a follow-up article commenting that the case was “more compelling than ever – not least because the stock is substantially cheaper.”

Among other things, Bed Bath & Beyond has been unresponsive to shareholder rebellions on board composition and pay at its annual meetings, and a variety of strategies including share repurchases, acquisitions, and digitalization, have failed to improve profits. Belatedly but unsurprisingly, a trio of activists has now nominated a 16-member slate to overhaul the company.

Legion Partners Asset Management, Macellum Advisors, and Ancora Advisors have pedigree but their plan is an ambitious one. (Joshua Schechter, a former Steel Partners executive and activist representative on several boards according to Activist Insight Governance, has been nominated but is not a shareholder). Full-board slates can easily be interpreted as overreach. Nominating one at Deckers Outdoor cost Marcato Capital Management board seats a couple of years ago.

Nonetheless, to force out 16-year CEO Steve Temares and octogenarian co-chairs (and co-founders) Warren Eisenberg and Leonard Feinstein, a majority slate is the very least the activists could have advanced. As Macellum has found at Citi Trends, where it is currently fighting its second proxy contest, one seat is often not enough. And given that Bed Bath & Beyond will likely respond with some board refreshment before the annual meeting, even a partial victory could create an unstable dynamic. Insider ownership is just 5.5%.

A key question is why it has taken this long. Certainly, other activists have looked at the stock and passed (only Third Point Partners ever disclosed a stake, in 2014). The decline of Sears Holdings and Toy R Us, plus the growth of internet-only retailers Wayfair and Amazon, scared off many investors. One I spoke to this week cited Bed Bath & Beyond’s lack of a strong private label or online business. “It’s a shame activists have to focus on returns,” he quipped.

Analysts at Raymond James this week noted that the company’s third-quarter earnings report could be interpreted as a sign the stock had hit rock bottom. Even so, short interest had soared to 30% – a factor that might have contributed to the 25% rise in the stock price when the activists announced their intentions.

The fact that analysts at both Goldman Sachs and Raymond James think Bed Bath & Beyond is now a takeover target probably helped too. According to the latter, “The math is even compelling if we postulate a sale of buybuyBABY and Cost Plus World Market, which would reduce a sponsor’s cash investment.” It says the company could be bought for a $3.8 billion enterprise value at only 5.1 times 2019 EBITDA. Plans announced this week by Wayfair, one online retailer, to build a physical store could herald a buyout as unlikely as Amazon’s acquisition of Whole Foods Market two years ago.

Wells Fargo analysts were a little more circumspect, seeing less radical change as a result of the activist play. “[W]e wouldn’t chase shares higher here, as we anticipate a long process with success not guaranteed, and calculate relatively low value (~$300-400M for buybuyBABY) and potential dis-synergies from divestitures (as many stores are combined),” they said in a note this week.

Regardless of this chatter, the weeks ahead will likely be filled with debates about how Bed Bath & Beyond can restore lost earnings and same-store sales. As my activist, who has stayed away from the stock, says, “Just because there’s competition, doesn’t mean you have to lose.”

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