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What Does GameStop's Chair Want for Bed Bath & Beyond?

We plan no change to our fair value estimate; shares fairly valued.

Securities In This Article
GameStop Corp Class A
(GME)
Chewy Inc
(CHWY)

No-moat Bed Bath & Beyond BBBY is again a focus of the activist community, with Ryan Cohen’s RC Ventures (with a 10% stake) aiming for change. We plan no change to our $23.50 fair value estimate and see shares as fairly valued after a more than 30% jump on the news. Cohen is GameStop's chairman GME and co-founder of Chewy CHWY .

Cohen’s letter to the board of directors on March 6 pointed out four areas for improvement, which included, first, consolidating the firm’s broad turnaround plan. Given the still numerous areas for improvement, we aren’t certain that a narrowing of the plan is as important as diverting higher attention to priority areas (like merchandising, real estate, marketing), where Bed Bath could have the best return on its investment.

Next, Cohen is interested in strategic alternatives for the Buybuy Baby banner, an outcome that could cede scale benefits. Specifically, with a 2023 sales goal of $1.5 billion at Baby versus the $7.8 billion in sales we forecast for the enterprise, vendor negotiations could fare less favorably in a breakup. RC Ventures also posits a full sale of the company could be beneficial, and we generally agree with this statement. In the hands of a private equity holder the turnaround could be solely focused on improving the economics of the business with no time allocated to engaging with shareholders, accelerating KPI improvement.

Lastly, RC pushes for closer alignment of leadership with equity owners--specifically a higher focus on performance-based pay, a factor we view as helpful in assuring executive motivation is appropriate. Given the idiosyncratic nature of the last two years, we aren’t judgmental that the turnaround hasn’t occurred as quickly as investors would prefer. We forecast EBITDA growth in fiscal 2021 and beyond, trending in the right direction. In absolute terms, operating profit dollars will remain structurally lower than in the past given the divestiture of brands and closing of underperforming locations. Over time, operating margin should return to around 5%.

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About the Author

Jaime M. Katz, CFA

Senior Equity Analyst
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Jaime M. Katz, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. She covers home improvement retailers and travel and leisure.

Before joining Morningstar in 2011, Katz was an associate for Credit Agricole Corporate and Investment Bank. She also worked in equity research for William Blair for three years and spent three years in asset management at Mesirow Financial.

Katz holds a bachelor’s degree in economics from the University of Wisconsin and a master’s degree in business administration from the University of Chicago Booth School of Business. She also holds the Chartered Financial Analyst® designation. She ranked first in the leisure goods and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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