Retail

Bed Bath & Beyond shares jump on analyst upgrade, high hopes for a new CEO

Key Points
  • Bed Bath and Beyond is seeing improved governance from a revamped board of directors, and less cluttered stores, according to one analyst.
  • The home goods retailer is also expected to name a highly experienced CEO, possibly during its earnings report Wednesday
  • WedBush upgraded its 12-month price target to $16 from $14.
Signage is displayed outside of a Bed Bath & Beyond Inc. store in Los Angeles, California, U.S., on Monday, Sept. 19, 2016.
Patrick T. Fallon | Bloomberg | Getty Images

Shares of Bed Bath & Beyond rose more than 6% on Monday after WedBush upgraded the company to outperform from neutral, citing improved governance from a revamped board of directors and less cluttered stores ahead of the holiday season.

WedBush analyst Seth Basham also said that with its earnings report scheduled for Wednesday, the home goods retailer might name a "well-regarded and highly experienced" CEO to lead the transformation of the company, which could drive share prices up. WedBush upgraded its 12-month price target to $16 from $14.

"While turning around declining retailers is a very difficult task, particularly amidst unfavorable secular trends and soft industry sales growth, we see a good chance of stabilization — if not growth — in earnings over the next two years as sweeping changes take hold," Basham wrote.

In the past few months, the company's board of directors has been revamped at the behest of three activist investor groups, who urged the company to overhaul the board "to stem the tide of value destruction." CEO Steven Temares resigned from the top job and from the board in May, and was succeeded by interim CEO Mary Winston.

According to Basham, the new changes have led to much-improved governance. The company has reduced its corporate staff by 7%, eliminated the role of the chief operating officer, and plans to cut inventory by about $1 billion, or 35%.

That's also one of the steps the company is taking to improve shopping experiences for customers, Basham said. Previously, the company faced concerns that stores were chaotic, with excess inventory and clutter. Ahead of the holiday shopping season, Bed Bath & Beyond has been putting more compelling and higher-margin products on the shelves, and removing older inventory. This adds to the company's signature "treasure hunt" experiences that drive consumers to shop at stores and gives them reasons to visit more frequently.

Bed Bath & Beyond also said on a recent earnings call that it is "reviewing and optimizing the company's asset base, including our portfolio of retail banners." It has reportedly hired Goldman Sachs to evaluate potential offers for some of its core divisions, including the sale of its Cost Plus World Market business.

Basham expects investors to realize the value of the company when it starts to sell off these assets or the real estate it owns. He said Cost Plus World Market is worth $250 million, or $2 per share, and that all of its noncore assets and real estate combined would be worth about $1.7 billion.

However, Basham said investors should expect to see earnings per share miss expectations when Bed Bath & Beyond reports Wednesday, because most of the initiatives are focused on the second half of the year. It is expected to earn 28 cents a share on revenue of $2.75 billion, according to a survey of analysts by Refinitiv.

Bed Bath & Beyond's stock has fallen just over 7% since the beginning of the year, bringing the company to a market value of $1.26 billion.

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