Company: Bed Bath & Beyond (BBBY)
Business: Bed Bath & Beyond runs a chain of retail stores. It operates through two segments, North American Retail and Institutional Sales. The company sells a range of domestic merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and various juvenile products. As of Feb. 27, 2021, the company had 1,020 stores, including 834 Bed Bath & Beyond stores in 50 states, the District of Columbia, Puerto Rico, and Canada; 132 buybuy Baby stores; and 54 stores under the names Harmon, Harmon Face Values or Face Values. It also offers products through various websites and applications, such as bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, facevalues.com, buybuybaby.com, buybuybaby.ca and decorist.com. In addition, it operates Decorist, an online interior design platform that provides personalized home-design services.
Stock Market Value: $2.1B ($22.07 per share)
Activist: RC Ventures
Percentage Ownership: 9.81%
Average Cost: $15.34
Activist Commentary: RC Ventures is the investing vehicle for Ryan Cohen. Cohen is an extremely successful entrepreneur turned activist investor. Cohen is the co-founder and former CEO of e-commerce company Chewy, which he built up and sold to PetSmart in 2017 for $3.35 billion. Cohen remained CEO following the acquisition until March 2018, and in June 2019, Chewy went public at a valuation of $8.7 billion. His first 13D filing was on GameStop, which famously soared to almost $500 per share primarily on the back of Reddit forums and short squeezing, making Cohen a paper profit of over $4 billion on his $8.43 average cost on 9,001,000 shares. Cohen proved then that he is a long-term investor more interested in fixing the company than personal profits by not selling a single share as the stock rose to these irrational levels. This is Cohen’s second 13D filing, demonstrating to the market that he is not just an entrepreneur dabbling in interesting stocks but an activist investor with an owner/operational mindset who is passionate about fixing mismanaged companies, particularly in the retail/consumer industries. Clearly, his strategic and operational qualifications in building and running a company in the digital era, give him a ton of credibility. Moreover, he invests only his own money, which certainly distinguishes him from most board directors and even activists.
What’s Happening?
On March 6, RC Ventures (RCV) sent a letter to the company’s board, calling on them to improve operations and maintain the right inventory mix to meet demand, while exploring strategic alternatives that include separating buybuy Baby and a full sale of the company.
Behind the Scenes
This is a different situation from GameStop. It is a company with a first-time CEO, declining same-store sales and a strategy that has not been working. It also has an incredibly valuable asset that is not reflected in the stock price – its buybuy Baby business, which is priority number one. The company needs to seriously explore monetizing that asset, which could be worth more than the entire company right now, and while pursuing a strategic transaction for that asset it would make sense to also explore a sale for the entire company.
Aside from this, the company needs to focus on operations. Management has been spreading itself very thin, focusing on everything from product mix to sales growth to private label to capital allocation and balance sheet. It needs to focus deeply on a few core issues instead. Ryan Cohen grew Chewy by focusing on one thing – providing a great customer experience. Chewy, GameStop, and BBBY are all somewhat commoditized businesses, and that is how you succeed in commoditized retail. This means having competitive pricing, fast shipping, a good product selection and great customer service. That is where management’s focus should be. Moreover, Bed Bath & Beyond could have better digital penetration like buybuy Baby does.
The company has been the subject of recent shareholder activism. On May 28, 2019, Legion Partners, Macellum Capital and Ancora Advisors settled for four board seats for John E. Fleming, Sue E. Gove, Jeffrey A. Kirwan and Joshua E. Schechter. The three funds have sold down their positions, but all four of their directors currently serve on the board. Ryan Cohen has stated that he is not interested in going on this board, likely because he is still heavily investing his time in GameStop, which is far from over. A reasonable outcome here would be to settle on three new, independent board seats with the formation of a strategic alternatives committee with at least one RC Ventures director on the committee, if not heading it. Ryan Cohen is somewhat new to the activism game, but he should not be taken lightly. He has the money, resources and conviction to commence a full-blown activist campaign if he is ignored.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.