Following several years of terrible earnings results, Bed Bath & Beyond (NASDAQ: BBBY) came under pressure from three small activist investment funds earlier this year. The funds -- Legion Partners Asset Management, Macellum Advisors, and Ancora Advisors -- have been agitating to replace the company's board and management.
While Bed Bath & Beyond has tried to push back against the activists' demands, the trio is quickly getting much of what they want. Most notably, long-serving CEO Steven Temares resigned abruptly on Monday, paving the way for a new management team to take charge.
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Bed Bath & Beyond has stumbled badly
Over the past three fiscal years, Bed Bath & Beyond's results have gone from bad to worse. In fiscal 2016, comparable store sales decreased 0.6%, and adjusted earnings per share fell to $4.58 from $5.04 a year earlier. Comparable sales fell 1.3% in fiscal 2017, while adjusted EPS plunged to $3.12. Finally, comps slid another 1.1% in the recently completed 2018 fiscal year, sending adjusted earnings down to just $2.05 per share.
During this three-year period, Bed Bath & Beyond's EPS actually benefited from share buybacks and a reduction in the federal corporate tax rate. Adjusted pre-tax profit -- a metric that isn't sensitive to those factors -- plummeted more than 70%, from $1.3 billion in fiscal 2015 to just $353 million last year.
In conjunction with its fourth-quarter earnings report last month, Bed Bath & Beyond projected that it would return to earnings growth this year. Management also claimed that a variety of turnaround initiatives designed to reduce inventory, boost gross margin, and cut expenses are starting to bear fruit.
However, comp sales and earnings both declined significantly last quarter, so whatever green shoots may exist aren't visible to investors yet. Furthermore, management has repeatedly underestimated the challenges facing the company in recent years, so investors can't be too confident in their relatively optimistic outlook for fiscal 2019.
Activists are getting their way
The activist funds dogging Bed Bath & Beyond have made it clear that they won't be satisfied with anything less than radical change. Following the fourth quarter earnings report, the group criticized the company's strategy and outlook, describing the CEO and board as "removed from reality."
Bed Bath & Beyond attempted to appease the activist funds later in April by refreshing its board. Co-founders Warren Eisenberg and Leonard Feinstein stepped down from their roles as co-chairmen and left the board, along with five of Bed Bath & Beyond's nine independent directors. Five new independent directors were appointed to join then-CEO Steven Temares and the four continuing independent directors. Eight of the current directors have been appointed within the past two years.
However, this move wasn't enough for the activist funds. They forged ahead with a campaign to replace the entire board with a slate of 10 candidates proposed by Legion Partners and continued to call for Temares' ouster.
This pressure finally had the desired effect over the weekend. On Monday, Bed Bath & Beyond announced that Temares would step down as CEO and leave the board, effective immediately. He will be replaced as CEO on an interim basis by Mary Winston, one of the new board members appointed last month. The board has begun the search process to hire a permanent successor.
Temares' time had come
Bed Bath & Beyond roughly tripled its revenue in the first 10 years after Steven Temares became CEO in 2003. Clearly, plenty of positive things occurred during his time at the helm.
That said, it is also clear that Temares bungled Bed Bath & Beyond's response to the growth of e-commerce and off-price retail. Given the rapid erosion of its profit margin, Bed Bath & Beyond now has little room for error as it pursues a turnaround.
The board gave Temares and his team plenty of time to get back on track, but despite the progress management touted last month, the retailer is still far from being healthy. The activist investors hounding this company may or may not have better ideas for how to run the business, but they are right in one respect: After 16 years in charge, it was high time for Temares to step aside and give someone else a chance to fix the ailing retailer.
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