3 Reasons Bed Bath & Beyond’s Accelerated Share Buyback Plans Are Brilliant


Some investors clearly loved the news, given the huge rally in the stock in response to the home goods retailer’s announcement. Bed bath and beyond (NASDAQ: BBBY). On the flip side, a handful of pessimistic investors may doubt the wisdom of accelerating the company’s $ 1 billion share buyback program. That’s a lot of money for a business that is still getting on its feet, and a lot of money for a business that also has over $ 1 billion in debt that could be drastically reduced with these funds.

This is, however, a case where the seemingly less responsible decision to buy back a company’s outstanding stock is actually a brilliant long-term decision … given its alternatives.

Image source: Getty Images.

Smarter than it looks on the surface

If you’re reading this and haven’t heard of Bed Bath & Beyond’s $ 1 billion share buyback authorization is so far ahead of schedule that it should be completed before the end of this fiscal year. .

The original plan was to complete these buybacks before the end of fiscal 2023 (ending early 2024). Indeed, the company announced on Tuesday that $ 600 million of those buybacks had already been completed in the second quarter of this year, leaving just an additional $ 400 million to be made. Now CEO Mark Tritton wants to expand this year’s buyback reserve from $ 325 million to $ 625 million, ending the effort.

Stock prices have climbed more than 90% in after-hours trading Tuesday on the news, further supported by reports the retailer will soon be working with Kroger as a business partner, and at the same time will open its e-commerce platform to more third-party brands. Most of that gain has since been returned, even though it was still up around 15% at Wednesday’s close, so it’s clear some shareholders are celebrating the developments.

Still another $ 300 million committed to a share buyback program? It is a difficult idea for some investors to digest.

The retailer is still rebuilding itself in an environment that has been altered by the pandemic, after all, and marred by issues in the global supply chain. While the company is faring much better in the second half of the year due to holiday shopping, in the first six months of the fiscal year ending in August, Bed Bath & Beyond lost $ 124 million.

Operating cash flow is positive for the period in question, but not impressively. The company’s core business generated $ 46 million in cash flow for the six-month period in question, on sales of just under $ 4 billion.

These are not numbers that could be considered a smash hit, even though Tritton’s turnaround plans appear to be working. Rather, this is a case where, given that the money is clearly available, it arguably makes more sense to pay off some of the company’s nearly $ 1.2 billion long-term debt. . Debt is a contractual obligation that must ultimately be repaid, but which must also be repaid in the interim. Reducing this debt would produce real and tangible benefits now. The value of a redemption may or may not reach the same value.

Don’t be too quick to jump to such a conclusion, however. An accelerated share buyback is actually the best way to create shareholder value right now. Here’s why.

1. Bed Bath & Beyond has the money, and few other needs: At the end of August, Bed Bath & Beyond had around $ 1 billion in cash. The company’s consolidation efforts also required some expense, such as investments in stores and logistics systems. However, many of these expenses have already been incurred and paid for, most of them self-financing due to widening margins; the retailer expects between $ 250 million and $ 350 million in EBITDA growth within three years alone from its top-down restructuring. Adding an additional $ 300 million to the buyback program won’t stop the retailer from doing other things it should be doing as well.

2. Retailer debt is not that expensive: Generally speaking, most organizations would prefer to operate debt free. Bed Bath & Beyond’s $ 1.2 billion debt isn’t choking the company, however. The retailer only spends around $ 70 million a year on interest charges. Once he shoots all cylinders again, he should earn a lot more than that.

3. BBBY stocks are cheap right now: Finally, an accelerated buyout makes a lot of sense right now as Bed Bath & Beyond shares are significantly undervalued. While the S&P 500 just hit an all-time high, BBBY stocks are currently trading roughly where they were a year ago. The market is not giving the company any credit for a revitalization effort that certainly seems to be paying off. This weakness, however, is not likely to last forever. Like any smart investor, the company gets a share when it is at a favorable price. It just happens to be his own stock.

A worthy purchase once the dust settles

It’s tempting to take a position right now, as stocks have cooled down a bit after Tuesday’s raging and searing rally. And maybe more optimism is indeed just around the corner.

If you don’t feel comfortable stacking yourself in a stock in the midst of a volatile move, you’re not crazy. Tuesday’s announcements certainly bolster the bullish argument, but it’s also prudent to let the proverbial dust settle a bit before taking the plunge on this business.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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