Activist Investors Clean House at Bed Bath & Beyond

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Bed Bath & Beyond (NASDAQ: BBBY) finally threw in the towel and agreed to almost all the demands of three activist investors by appointing four new directors to the board and reviewing the possibility of selling underperforming businesses, including buybuy Baby, Christmas Tree Shops, and Cost Plus World Market.

Private equity firms Legion Partners, Macellum Advisors, and Ancora Advisors have succeeded in virtually wiping the slate clean. CEO Steven Temares has resigned from the home goods retailer and its board, the company's founders also retired from the board, and five additional independent directors were appointed.

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A shell of its former self

As it was previously constituted, Bed Bath & Beyond's board lacked the foresight to adequately respond to the threat posed by e-commerce. After years of delay, it lamely acquired tiny niche outlets like PersonalizationMall, One Kings Lane, and Decorist, an online interior design service. The board also bailed out relatives of the founders by buying two businesses they started, buybuy Baby and Chef Central.

The hedge funds calculated the board of directors allowed founders Warren Eisenberg and Leonard Feinstein to preside over the destruction of $8 billion in shareholder value during Temares' 16-year tenure as chief executive, while reaping over $300 million in compensation in just the last four years as the stock lost 80% of its value.

The firms said Bed Bath & Beyond retains substantial value, but it could only be unlocked if the board was razed and Temares removed. For good or ill, the activist investors have mostly achieved their goal, and now they will have to perform. And it's not going to be an easy task.

No longer the home goods leader

Home goods retailing has changed markedly over the years after Bed Bath & Beyond's industry leadership following Linens 'n Things bankruptcy a decade ago.

Although that was seen as an opportunity for Bed Bath & Beyond to flourish, the retailer instead largely sat on its laurels as Walmart, Target, and other mass merchandisers beefed up their home goods selections. And discount chains like TJX's HomeGoods proliferated -- even launching sister chain Homesense in 2017.

At Home went in another direction and opened a string of large home-goods superstores, but lately has felt the competitive pressures and is seeking to sell itself. Department store chain Kohl's, which itself generates some $3.6 billion in annual home goods sales (about 30% of Bed Bath & Beyond's $12 billion), is reportedly interested in buying At Home because it wants to push home furnishings even more.

The online arena that Bed Bath & Beyond ignored for so long is led by Amazon.com, which considers home decor one of its top priorities, and Wayfair, which is pursuing brick-and-mortar retail.

Consumers have many choices for home goods today that weren't readily available a decade ago, and Bed Bath & Beyond has squandered its leadership position. Even a fresh start makes it difficult to see how it will overcome the many roadblocks before it.

A place to start

Shares of the home goods retailer -- which surged when the private equity firms announced they would mount a proxy battle and seek to replace the board -- have since retreated. The stock now trades below where it stood when the plan was first revealed because investors seem to understand the monumental task facing the company, even with a reconstituted board in place.

Calving off its ancillary businesses might be a good start. CNBC reports that the private equity firms believe buybuy Baby, Christmas Tree Shops, Cost Plus, and PersonalizationMall could be worth a total of $1.36 billion, or $10 per share. Still, investors should not jump in here.

There is no plan yet to get Bed Bath & Beyond growing again. Although the private equity firms were aghast that the old management was going to limit the retailer's ubiquitous 20%-off coupons without a fallback plan to attract customers, the discounting has long been a major source of the retailer's problems. Consumers now expect it, so with or without the coupons, Bed Bath & Beyond is stuck.

There may be more hope for recovery with fresh faces in place, but it's going to be a long road before Bed Bath & Beyond can be seen as a viable investment again.

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