What Does GameStop's Chair Want for Bed Bath & Beyond?

No-moat Bed Bath & Beyond BBBY is again a focus of the activist community, with Ryan Cohen’s RC Ventures (with a 10% stake) aiming for change. We plan no change to our $23.50 fair value estimate and see shares as fairly valued after a more than 30% jump on the news. Cohen is GameStop's chairman GME and co-founder of Chewy CHWY .

Cohen’s letter to the board of directors on March 6 pointed out four areas for improvement, which included, first, consolidating the firm’s broad turnaround plan. Given the still numerous areas for improvement, we aren’t certain that a narrowing of the plan is as important as diverting higher attention to priority areas (like merchandising, real estate, marketing), where Bed Bath could have the best return on its investment.

Next, Cohen is interested in strategic alternatives for the Buybuy Baby banner, an outcome that could cede scale benefits. Specifically, with a 2023 sales goal of $1.5 billion at Baby versus the $7.8 billion in sales we forecast for the enterprise, vendor negotiations could fare less favorably in a breakup. RC Ventures also posits a full sale of the company could be beneficial, and we generally agree with this statement. In the hands of a private equity holder the turnaround could be solely focused on improving the economics of the business with no time allocated to engaging with shareholders, accelerating KPI improvement.

Lastly, RC pushes for closer alignment of leadership with equity owners--specifically a higher focus on performance-based pay, a factor we view as helpful in assuring executive motivation is appropriate. Given the idiosyncratic nature of the last two years, we aren’t judgmental that the turnaround hasn’t occurred as quickly as investors would prefer. We forecast EBITDA growth in fiscal 2021 and beyond, trending in the right direction. In absolute terms, operating profit dollars will remain structurally lower than in the past given the divestiture of brands and closing of underperforming locations. Over time, operating margin should return to around 5%.

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