Bed Bath & Beyond To Sell Online Gift Unit, Gives Capital Plan

Shares of Bed Bath & Beyond Inc. (NASDAQ:BBBY) rose 3.8% in the pre-market session on Feb 18, after it announced an agreement to sell its online gifting business and outlaid a $1-billion capital plan based on recent transactions. The company agreed to sell its PersonalizationMall.com business to 1-800-Flowers.com Inc (NASDAQ:FLWS) for $252 million.

The sale will include the PersonalizationMall.com website along with its modern 360,000 square feet production and distribution facility in Bollingbrook, IL.

The sale of the online gifting business is part of Bed Bath & Beyond’s ongoing business transformation strategy, which is aimed at the simplification of its business portfolio to improve focus on the core Home, Baby and Beauty businesses. With the sale, the company expects to free up capital and invest in ways to re-establish its position in the home-furnishings category.

It expects to close the transaction in the first quarter of fiscal 2020, subject to regulatory approvals. Following the closure, PersonalizationMall.com will continue to provide personalization and product services to Bed Bath & Beyond, and buybuy BABY.

Based on the capital unlocked from the above transaction and other recent actions, the company also provided its capital allocation strategy for fiscal 2020. The new capital plan includes spending of about $1 billion for shareholders’ returns, debt reduction and reinvestment in its core operations. The company noted that its cash position will be boosted by the aforementioned sale of PersonalizationMall.com, proceeds from the sale-leaseback transaction announced in January 2020, and expected cash flow generation.

Notably, the sale-leaseback transaction with an affiliate of Oak Street Real Estate Capital will garner net proceeds of more than $250 million. The deal included 2.1 million square feet of commercial space, with a distribution facility, office space and retail outlets. Management notified that it will continue to occupy the aforesaid space through long-term leases.

Coming back to the capital plan, the company plans to take a balanced approach to use available capital for boosting shareholder value, improving in-store and online experience, and achieving long-term sustainable growth.

Under the strategy, Bed Bath & Beyond plans to use up to $600 million for shareholder returns through dividend payouts and share buybacks, and reducing debt. Currently, the company has $1.2 billion available under its $2.5-billion share repurchase program. Moreover, it expects to incur capital expenditure of $350-$400 million for the period, including investments in stores, IT and digital projects, and supply-chain infrastructure.

Furthermore, the company’s capital allocation plan supports its strategic business plan. As a result, it anticipates delivering SG&A savings in the near term along with savings in cost of goods sold in the longer term, driven by the implementation of owned-brand strategies, re-negotiation of sourcing agreements and further optimization of its supply chain.

In the last week, Bed Bath & Beyond’s shares tumbled, following an update on fourth-quarter fiscal 2019 performance. The Zacks Rank #4 (Sell) company posted a comparable sales decline of 5.4% for the first two months of the fiscal fourth quarter. This reflected a low-double-digit percentage decline in transactions in stores, partly countered by a mid-single-digit percentage rise in the average transaction amount. The decline can be attributed to soft store traffic, issues related to inventory management, and higher promotional activity and markdowns.

In the past three months, shares of Bed Bath & Beyond have declined 8% compared with the industry’s 5% growth.

Management stated that the company is facing short-term hurdles in its efforts to stabilize the business. Notably, it is witnessing soft store traffic trends along with execution challenges.

However, the upside in share price in the pre-market session on Feb 18 shows investors’ optimism, regarding the company’s ongoing transformation efforts and the recent capital plan. Nevertheless, we believe pronounced gains from these efforts will take time to show on its financial performance.

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