What Bed, Bath, and Beyond Teaches us About Turnaround Investing
/Have you ever wanted to make money investing in a public company that is poised to turnaround?
Let me first define a public company turnaround investing opportunity…
First, a company’s stock takes a nosedive. Then, you believe that the stock is undervalued because the stock is poised to rebound as soon as the company turns around and performs better. Value investors love investing in turnaround opportunities because one can buy a company on the cheap in hopes that the stock market will eventually reward it for improving operations and profitability. So, investors can make a lot of money when the stock price rises, and they eventually sell the stock for a big profit.
When I worked at JPMorgan Asset Management as a value investor, we loved turnaround opportunities IF AND ONLY IF the companies actually turned around. If not, it was a disaster and we often lost money. So, I warn you: be careful when trying to make money from turnaround opportunities and conduct your due diligence.
Hence, we come to Bed, Bath, and Beyond (TICKER: BBBY). Many investors started to think about Bed, Bath, and Beyond as a turnaround investment opportunity back in 2019. At the beginning of 2019, the stock was trading near $15, down from over $80 at the end of 2013. Sales and profits had plummeted, and many people believed that BBBY wouldn’t make it. But, some investors soon became encouraged with BBBY’s newly shaped activist Board, a new CEO in Mark Tritton by November of 2019 (who stepped down at the end of June of this year), and a grand ‘ole plan to turn the company around. That was almost 2.5 years ago, and in July, the stock has traded below $5. See the full chart below.
I have been actively following BBBY since the beginning of 2022 when it reported horrible earnings and the signs of a turnaround truly waned. I’m fascinated with this company’s recent journey, which got worse after the company reported disappointing quarter fiscal first-quarter earnings this past June. BBBY teaches us a few key cautionary lessons when it comes to investing in turnaround opportunities, especially retail.
Pay attention to what the company is doing about its ‘infrastructure.’ Many turnaround opportunities are rooted in operational improvements. For BBBY, the CEO Tritton wanted to overhaul the company’s systems and ‘infrastructure’ (e.g. website, ordering systems, mobile order, and pick-up capabilities), as detailed in the Wall Street Journal’s “Bed Bath & Beyond Followed a Winning Playbook—and Lost” article. The problem was that the timing was so bad - the onset of COVID, BBBY’s competitors' infrastructure was far superior, and BBBY was too late to meet consumer demand.
Determine if the company is addressing consumer preference. Companies must keep a pulse on what customers want and need, not focus on their own desires to the detriment of consumers. BBBY lost sight of what made them successful - consumers coming to BBBY for a unique experience and certain branded products. By changing from a decentralized product ordering system to a centralized ordering system, individual store managers and purchasers could not meet the buying demands of their local shoppers because they had little control of their own inventory. Also, BBBY adopted a very aggressive private label strategy, which backfired because, unlike other retailers who had been successful with this move, BBBY alienated customers because customers were used to finding a certain niche, branded products in BBBY stores. Consumers want quality and affordability, and they just haven’t gotten it from BBBY.
Use your lived experience. Despite company filings and earnings reports, it can be hard to truly understand what a company is doing and whether the company is on track (or not). Companies can sometimes manipulate earnings data and often tell a more rosy picture of their outlook than reality. Here’s when you should rely on your first-hand research, especially when you can visit a company’s stores or experience their products. You should go visit a BBBY and see for yourself how their stores have changed, and you may feel the disconnect that many shoppers have felt for a while. Or, check out their online presence. I recently bought massive goods on sale from BBBY and it raised many red flags from a stock investor perspective because I wondered why the company was discounting items so much. When in doubt, and where available, see trends with your own lived experiences!
So, remind yourself of these lessons when you get excited about a turnaround investing opportunity. Or, perhaps you have lessons of your own. Leave a comment below.
A Wealthy Girl Corner
This week we celebrated National Financial Awareness Day (8/14) and the entire month of August is Black Philanthropy month, a global celebration of generosity across the African diaspora. As we head into the last days of summer, take some time to make yourself aware of what investment opportunities might be for you (or not), including turnarounds of public stocks. And, if you want to celebrate Black philanthropy month, you can join the conversation HERE with renowned researcher Regina Alhassan, who purports in her TEDx talk that “African-Americans are the most charitable people in the U.S.”
Enjoy the rest of August! I’ll see you back in September. Good luck with any back-to-school processes and gearing up for fall!
