Last week, Bed bath in addition (NASDAQ: BBBY) made a number of announcements. Most importantly, the company announced to investors that it plans to complete its previously announced $ 1 billion share buyback program by the end of fiscal 2021.
That move helped trigger a short squeeze, which caused Bed Bath & Beyond shares to jump up to 85% in after-hours trading on Tuesday. After giving up some of those gains, the stock was still up 61% for the week.
But while Bed Bath & Beyond has been rebuilding its business over the past two years under new CEO Mark Tritton, large share buybacks have become its strategy to keep shareholders happy. That can’t end well for the company.
Underlying performance remains weak
In late September, Bed Bath & Beyond reported terrible results for the second quarter of fiscal 2021. Total revenue from the company’s top retail banners fell 11% year-over-year to $ 1.99 billion, missing the forecast range of $ 2.04 billion Dollars to $ 2.08 billion. Gross margin also fell short of management’s expectations, which resulted in Adjusted earnings per share (EPS) falling 92% year over year to just $ 0.04. Analysts had expected earnings per share of USD 0.52.
Bed Bath & Beyond attributed poor performance to a sharp drop in customer traffic in August (the last month of the quarter) and rising supply chain costs. Additionally, Tritton cautioned investors that these two challenges would persist through September (the first month of fiscal third quarter).
As a result, Bed Bath & Beyond lowered its forecast for the year. It now expects net sales of between $ 8.1 billion and $ 8.3 billion, compared to sales of $ 9 billion for its core banners in fiscal 2019. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will be Ranging from $ 425 million to $ 465 million, down from an earlier estimate of $ 520 million to $ 540 million. Meanwhile, management lowered its adjusted EPS forecast from previously $ 1.40-1.55 to $ 0.70-1.10.
For the third quarter, Bed Bath & Beyond expects revenues between $ 1.96 billion and $ 2 billion – compared to $ 2.19 billion last year – and earnings per share between break-even and 0.05 U.S. dollar. And the company expects a significant improvement in sales in November in order to meet its forecast.
Share buybacks were a core part of the financial strategy that Bed Bath & Beyond revealed at its investor day in late 2020. At the time, the company announced a $ 225 million accelerated share buyback and planned to repurchase an additional $ 450 million in stock between fiscal 2021 and fiscal 2023.
Bed Bath & Beyond’s buyback plans have since grown more ambitious. The company expanded its overall share buyback target to $ 825 million in January and $ 1 billion in April. And on Tuesday, Bed Bath & Beyond announced that it now plans to complete the full $ 1 billion buyback program by the end of this fiscal year: two years ahead of the previous schedule. That equates to approximately $ 400 million in buybacks in the second half of fiscal 2021.
On the one hand, Bed Bath & Beyond has plenty of cash: it ended the second quarter with around $ 1 billion in cash and investments. On the flip side, for the first $ 600 million shares she bought back, she paid an average of about $ 25 per share: above current market price. Additionally, Bed Bath & Beyond’s stock trades at 25 times the mean of its EPS forecast for fiscal 2021. At this valuation, management could again overpay by buying back shares now.
How about some turnaround advances first?
There is nothing fundamentally wrong with companies using excess cash to buy back stocks. However, Bed Bath & Beyond is buying more and more stocks despite deteriorating business fundamentals. The company’s forecast adjusted EBITDA for fiscal year 2021 of $ 425 million.
To make matters worse, Bed Bath & Beyond reported these poor results despite a lively furnishing market. In August (when the retailer’s traffic apparently collapsed), sales in U.S. furniture and home decor stores rose 18.4% compared to August 2019.
To be fair, Bed Bath & Beyond’s turnaround initiatives haven’t had much time to pay off. But at some point the tide for furniture retailers will run out. This macroeconomic headwind could more than offset all the benefits of the company’s turnaround strategy and result in further EBITDA declines.
If there was real evidence of a rebound in Bed Bath & Beyond’s business, aggressive share buybacks might make sense. For the time being, however, the trend reversal has not gained momentum. Buying back shares will weaken the company’s balance sheet and give it less flexibility to change course if management’s current strategy doesn’t pay off.
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