Wedbush analysts disagreed with RC Ventures’ assessment of the value of Bed Bath & Beyond Inc.’s baby business in a note Monday, saying Buybuybaby could be worth more than $1 billion but not the “several” billions that Ryan Cohen said in a letter claimed sent to the housewares retailer.
bed bath & beyond BBBY,
Shares rose 34.2% in Monday trade but slashed previous gains of up to 86% after the Wall Street Journal reported on RC Ventures’ stake in the company and linked the March 6 letter to Argument for Bed Bath & Beyond to refocus its efforts away from an “awkward” growth strategy and explore strategic alternatives for Buybuybaby.
“Another avenue that can streamline Bed Bath’s strategy and unlock value trapped in the company’s underperforming stocks is through a sale or spin-off of BABY Banner. Given that BABY is projected to reach $1.5 billion in revenue in fiscal 2023 with a double-digit growth profile and at least 50% digital penetration, we think it’s likely to be far more valuable than the entire market cap of the company today company,” the letter said.
“We believe that given the right circumstances, BABY could be valued at a sales multiple like other e-commerce-focused retailers and could warrant a multi-billion dollar valuation.”
See: Kohl’s aims to grow Sephora into a $2 billion business, which is part of the retailer’s long-term plan
Wedbush agrees that Bed Bath & Beyond may limit its scope for a turnaround, but disagrees with the value of the baby business. Wedbush takes into account the cost of running Buybuybaby as a standalone business in its current review.
“We see a valuation range for Baby from $900 million (9 x $100 million EBITDA including overhead) to $1.7 billion (13 x $130 million EBITDA including overhead) – this is a broad one Range, but a far cry from the $2 billion proposed by Mr. Cohen. ‘ Wedbusch said.
Analysts are raising concerns that if Buybuybaby is at the high end of that range, the Bed Bath & Beyond banner could be worth $800 million, meaning Bed Bath & Beyond is losing market share.
“Supply chain issues compounded disruption from merchandising changes in recent quarters, but it’s not clear if the company’s value proposition is resonating,” Wedbush said.
“While Bed Bath & Beyond shares could rise higher on new activist engagement and high short interest, without greater visibility into the sustainability of market shares for core Bed Bath business, we remain sidelined.”
Wedbush has a neutral rating on Bed Bath & Beyond stock with a 12-month price target of $14.
Analysts at KeyBanc were also wary of Cohen’s valuation, even commenting bearish on Bed Bath & Beyond stock.
“While RC Ventures’ position and Buybuybaby’s value could help support the shares, we remind investors that many of the aspects of Sunday’s letter reflect those called for by activists in 2019, which has already prompted a change in the… Majority of board and company led management team as well as divestment of many assets,” KeyBanc Capital Markets wrote in a statement.
KeyBanc ranks Bed Bath & Beyond as Underweight with a price target of $10.
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Wells Fargo was also bearish on the retailer: “In our view, the Bed Bath & Beyond asset remains structurally disadvantaged, fundamentals are weakening and the activist pitch is largely based on a takeaway that we believe is overly complicated and unlikely.”
Wells Fargo is underweight shares of Bed Bath & Beyond, but raised its price target to $20 from $12.
Bed Bath & Beyond confirmed receipt of the letter from RC Ventures on Monday and said 2021 is the first year of a multi-year transformation plan.
“The board and management team of Bed Bath & Beyond maintain an ongoing dialogue with our shareholders and while we have not previously had any contact with RC Ventures, we will carefully review their letter and hope to constructively engage with the ideas they bring forward.” , according to the company in a statement.
In the meantime, the stock’s gains may reflect the fact that it’s achieved meme stock status. In January, the company said supply chain disruptions and labor shortages had put the company under so much pressure that it was struggling to get busy printed circulars.
A number of other retailers have also recently faced activist activity, including Kohl’s Corp. KSS,
and Macy’s Inc. M,
Bed Bath & Beyond shares have fallen 29.9% over the past year, while the S&P 500 Index SPX,
has gained 9.9%.
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