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3 Huge Challenges Facing the Next Bed Bath & Beyond CEO

Bowing to intense activist investor pressures, Bed Bath & Beyond (NASDAQ: BBBY) this week announced the immediate departure of its CEO and the start of a hunt for a permanent successor. Outgoing leader Steven Temeres had a good argument to make in asking for shareholder patience. After all, the retailer was outperforming the profit rebound plan it detailed in early 2018.

Yet in the end, investors couldn't accept the chain's worsening sales results, given the broader strength across most retailing niches last year.

The new CEO will take over a company that counts some assets that will be helpful in any rebound effort, including a strong financial position, lean inventory, and flexibility when it comes to closing underperforming stores. However, the odds are still stacked against Bed Bath & Beyond's return to its former glory days.

Image source: Getty Images.

1. Weakening market share

The chain posted a modest same-store sales decline last year, consistent with the initial outlook that management gave in early 2018. But meeting Temeres' conservative goal didn't erase the fact that sales have now dropped in each of the last three years. Bed Bath & Beyond's reduced revenue base doesn't compare well to peers in other parts of the industry, either. Walmart and Target each enjoyed their best sales growth year in a decade, and off-price home goods and apparel specialist TJX Companies doubled its expansion rate year over year.

In that context, Bed Bath & Beyond's revenue slump means it is losing shoppers to rivals both online and in physical stores. That market share decline hasn't been arrested by management's merchandise reboot efforts, either, and so it's not clear what a new CEO could do to end the chain's multiyear sales slide.

2. Promotion fatigue

Bed Bath & Beyond faces even bigger struggles in trying to end its reliance on price cuts to drive customer traffic. Management tried removing low-margin products from its shelves last year, tweaked pricing, and adjusted the promotions it announced through its widely circulated coupons.

Despite those moves, gross profit margin declined by almost a full percentage point to 35% of sales. Cost cuts lessened the impact on the bottom line, but the bigger-picture trend is clear. Operating margin dipped to below 4% last year, falling for the third straight year and landing well short of the 12% return investors saw in fiscal 2016.

3. Unprofitable stores

The incoming CEO's new strategy should include some right-sizing of the store base since several years of falling customer traffic have no doubt pushed more locations into negative cash flow territory. The chain already hinted at as many as 40 closures in 2019, and additional cuts would be easy to make as short-term leases come up for renewal.

But Bed Bath & Beyond can't just cut its way back to growth. Indeed, sales challenges might actually get harder as it whittles down its base, particularly while peers open new locations to use both as customer traffic draws and as pick-up points for online orders.

Across the retailing industry, national companies including Target, Walmart, TJX Companies, and Home Depot are pouring resources into their stores. Bed Bath & Beyond's new leader won't be looking at the same healthy returns from its shopping base, and so the financial case for more store spending is much less compelling. But Bed Bath & Beyond still has to try to squeeze as much efficiency as it can from its existing retailing network. That dilemma will add to a long list of issues that the retailer's new leader will face whenever they step in to this challenging turnaround effort.

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Demitrios Kalogeropoulos owns shares of HD. The Motley Fool recommends HD and TJX. The Motley Fool has a disclosure policy.


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