Bed Bath & Beyond Soars On Accelerated Buyback (NASDAQ:BBBY)

34.91K Followers

Summary

Company to finish $1 billion plan by the end of fiscal year.
Share count to be reduced nicely yet again.
Shares surge more than 80% in Tuesday's after-hours session.

A Bed Bath and Beyond store in Buffalo, USA — JHVEPhoto/iStock Editorial via Getty Images

After the bell on Tuesday, shares of retailer Bed Bath & Beyond (BBBY) surged tremendously after the company announced a major update to its share repurchase program. With shares having plunged after the latest earnings report, it appears that management did not believe the fall was justified, and thus this is a way to provide tremendous value for shareholders. However, just like we saw twice earlier this year, investors have to be very careful not to chase this name when it is moving sharply higher.

The initial plan was for the $1 billion share repurchase plan to be finished by the end of fiscal 2023. Currently, we are in the third fiscal quarter of 2021, which started on August 29th. The company now expects to repurchase the remaining $400 million left on this program by the end of fiscal 2021, specifically over the third and fourth quarters, with the table below detailing the overall schedule of the buyback plan.

(Source: press release linked in opening)

Back in late 2020, I talked about major short squeeze potential for the name when the buyback plan was originally in the works. Initially, $675 million worth of shares were to be bought back, and at that time, the outstanding share count was around 126 million. As of the end of August, based on the most recent 10-Q filing, the share count was down to 101 million. The potential for a major short squeeze was based on the fact that roughly 60% of the outstanding share count was short then.

The stock did surge earlier this year when the meme stock / retail trading mania was in full force. Short interest quickly dropped from more than 76 million shares to under 20 million, but was back up to more than 26.8 million as of the mid-October update. More than a quarter of shares short a few weeks ago still is quite a lot though, and it certainly would set up the name for a strong move on a major catalyst like Tuesday's news. In the press release for this accelerated buyback announcement, CEO Mark Tritton issued the following statements:

We continue to execute our bold transformation and implement successful strategies that will fortify our near-term and long-term value creation. Today's announcement further underscores our ongoing confidence in our turnaround, and our ability to simultaneously generate positive cash flow, maintain a strong balance sheet and invest in our long-term growth, all while returning significant capital to shareholders. We remain committed to our capital allocation framework of delivering strong and sustainable total shareholder return.

As we continue to navigate the third quarter, the corrective and surgical pricing actions we've implemented are resulting in a trend toward expected gross margin rates for the period. Sales to date have remained consistent with the September trends we shared on our earnings call several weeks ago. Our focus remains on delivering comp sales growth in the all-important November month, which represents a disproportionately larger impact to our quarterly sales. We are preparing for the peak Holiday season and are particularly excited about the new future sales channels that we've announced today, which are our strategic collaboration with Kroger and our own digital Marketplace.

It was that late September earnings report that sent the stock crashing, as the company missed on both the top and bottom lines and issued soft guidance for the current quarter. The company is still seeing large revenue declines as it closes some stores and has divested non-core brands, but the hope currently is that revenues can be flat or even show some growth again in the next couple of years. Perhaps the bigger hope is that management has greatly improved the cost structure here and eliminated enough underperforming assets that profitability and solid cash flow can be delivered moving forward.

As the chart below shows, this has been a very volatile stock this year, with two massive rallies that came to very abrupt ends. Recently, shares had bounced more than 25% from their 52-week low, rising almost 10% alone on Tuesday. After the bell, shares jumped more than 81%, topping $30 a share for the first time in a couple of months.

(Source: Yahoo! Finance)

Like I said in previous articles, this major buyback plan is certainly a positive catalyst for the stock. Management certainly believes in the company, and $400 million will go a long way to getting the share count well under 100 million. The only problem is that every spike like this makes a buyback plan much less powerful, so you hope that management was able to get a good amount of shares bought back in the mid-teens. I should also point out that as of Tuesday, the average price target on the street was $18.78. Even if that number rises a little from here based on fewer shares outstanding moving forward, it still means analysts think the stock is headed a bit lower from current levels.

In the end, the accelerated share repurchase plans at Bed Bath & Beyond is certainly a positive catalyst. $400 million worth of stock is expected to be repurchased in the back half of this fiscal year, two years earlier than planned. That should reduce the outstanding share count by another roughly 13% even if you use an average buyback price of $30 after the more than 80% surge Tuesday afternoon. While this is good news in the long run, and the stock could certainly continue its spike in the near term, history says that those buying on these frenzies usually lose out, so I'd be very careful with the name right now.

This article was written by

Bill Maurer

34.91K Followers

I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have been active in the markets for several years, and am primarily focused on long/short equities. I hold a Bachelor of Science Degree from Lehigh University, where I double majored in Finance and Accounting, with a minor in History. My major track focused on Investments and Financial Analysis. While at Lehigh, I was the Head Portfolio Manager of the Investment Management Group, a student group that manages three portfolios, one long/short and two long only. I have had two internships, one a summer internship at a large bank, and another helping to manage the Lehigh University Endowment for nearly a year. Disclaimer: Bill reminds investors to always do their own due diligence on any investment, and to consult their own financial adviser or representative when necessary. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

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