Morningstar | Cooperation With Activist Group Alleviates Management Distraction at Bed Bath; Shares Overvalued
Following in the footsteps of narrow-moat competitor L Brands, no-moat Bed Bath & Beyond has reached a settlement with its three-party investor group to cooperate to improve the business. The activist group’s initial demands included removing longtime CEO Steven Temares and turning over the board of directors, both of which have been accomplished. On May 13, Temares stepped down, with board member Mary Winston taking the interim CEO position, and 12 of the 13 directors set for election are fresh to the firm, having been appointed within the last two years. With these changes underway, the investor group has pulled its nominees and is now supporting the company-recommended nominees.While this removes headline risk, it doesn’t change the secular challenges that Bed Bath faces. While there was no mention of specific business line performance in the firm’s press release, CNBC has reported that Bed Bath will weigh the sale or spin-off of underperforming businesses, including Buy Buy Baby, Cost Plus, Christmas Tree Shops, and Personalization Mall, which could be worth about $1.4 billion, according to the investor group. Even with a renewed focus on the core boxes, we think Bed Bath will struggle to drive traffic, at least until a more meaningful store-refreshment initiative gets underway; even after such an event, the firm will still have to fight to hold share, as e-commerce retailers compete fiercely in the categories it operates in. Ongoing efforts fail to sway our long-term opinion of the business, and we are maintaining our $10.80 fair value estimate, implying that the shares are overvalued. Secular concerns remain the biggest headwind in our five-year outlook for a 3% sales decline and 3% average operating margin performance.
Bed, Bath & Beyond is an omnichannel retailer providing products, services and solutions for the home and life events. The company operates an ecommerce platform consisting of various websites and applications, including bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, and facevalues.com. The company sells an assortment of domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings (including furniture and wall decor), consumables and certain juvenile products.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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