- 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.
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
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.