Bed Bath & Beyond's pace of turnaround is disappointing, analysts say

Key Points
  • Analysts expressed disappointment with the pace of progress made in the company's turnaround.
  • Wells Fargo wrote that earnings "were a clear reminder that BBBY's turnaround has yet to yield material signs of improvement."
  • The company reported mixed fiscal second-quarter earnings Wednesday and announced it was closing 60 stores, which was more than it previously expected.
Shoppers walk past a Bed Bath & Beyond store in Washington, D.C.
Andrew Harrer | Bloomberg | Getty Images

Shares of Bed Bath & Beyond traded less than a percent higher Thursday, after falling 6% before the market opened. The company reported mixed fiscal second-quarter earnings the night earlier and announced it was closing 60 stores.

In notes, analysts expressed disappointment with the pace of progress made in the company's turnaround.

"Initiatives are in-motion, but progress is limited," wrote Jefferies analyst Jonathan Matuszewski. Wells Fargo analyst Zachary Fadem also wrote that the earnings results "were a clear reminder that BBBY's turnaround has yet to yield material signs of improvement."

In the past few months, a new board of directors has been trying to transform the company, after a trio of activist investors urged an overhaul of the board to "stem the tide of value destruction." Former CEO in May and was succeeded in the interim by Mary Winston, but the company said it expects to announce a permanent successor within weeks.

As a result, Bed Bath & Beyond has outlined several near-term priorities to turn around its business including stabilizing sales and driving top-line growth, resetting its cost structure, reviewing and optimizing its asset base, and refining its organization structure.

On Wednesday, the company announced that sales at Bed Bath & Beyond stores open more than 12 months declined 6.7%. According to Matuszewski, that is part of an eight-year deceleration and "speaks for brand health." A Jefferies survey from February noted that Bed Bath & Beyond is the "number one concept where consumers are pulling back spend, so the transformation timeframe could take longer than bulls may believe."

Fadem noted that the aggressive improvement initiatives are actually driving widening same-store sales declines, fewer coupon redemptions, and has had a negative impact on online sales.

"In our view, these attributes are indicative of a business clearly lacking direction, with few fundamental positives for bulls to hang their hats on," Fadem wrote.

However, WedBush analyst Seth Basham, who upgraded the company to outperform from neutral a few days before earnings, was more optimistic, and reiterated his rating. He said the company has been making progress on addressing the main complaint from customers — that shopping in Bed Bath & Beyond stores is confusing due to excess inventory.

"Most notably, clearing aged inventory and inventory not consistent with the company's curated merchandise assortment strategy will declutter stores and leave room to add traffic-driving treasure hunt merchandise," he wrote.

Bed Bath & Beyond has been trying to prevent excess inventory and discounting from deterring customers from shopping at its stores. To declutter stores, the company said that more than $350 million in inventory will be removed before the holiday season, through markdowns, clearance events and hiring an independent liquidator.

Basham said using liquidation firms will help to avoid cannibalization of Bed Bath & Beyond sales.

He also said the company's plan to refresh 160 of its best-performing stores before the holiday season and the addition of promotions and advertising will drive traffic and sales.

KeyBanc analyst Bradley Thomas was on the fence, noting that the company "remains under fierce competition, which is likely to continue." He said that even though it's not clear whether Bed Bath & Beyond can effectively reposition itself in the long term, "there are numerous opportunities to unlock value in the medium term," such as selling off some of its assets, closing stores, and adjusting its promotional and pricing strategy.

During its conference call Wednesday, the company said it would close 60 stores, comprised of about 40 Bed Bath & Beyond locations and 20 stores from its other brands.

Shares of the company have fallen around 28.5% in the past year, bringing it to a market cap of $1.3 billion.

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