• 2019 guidance looks aggressive and BBBY might face higher restructuring charges and other costs if it seeks to accelerate its transformation.
• That could result in further near-term stock price volatility.
• Yet, the stock's valuation is exceptionally low, especially vs. peers.
• Assuming that the transformation plan gets on track, I see significant upside potential in the stock over the next 18-24 months.

Bed Bath and Beyond, Inc. (BBBY) reported a fiscal 2019 first quarter loss of $2.91 per share, which included approximately $3.03 per share of unusual charges and expenses. Excluding these unusual items, adjusted EPS was $0.12 per share, at the high end of management’s guidance range of $0.07-$0.12, but lower than last year’s adjusted EPS of $0.38.

Net sales of $2.57 billion declined 6.6% from the prior year, slightly below the company’s guidance of $2.6 billion. Comparable store sales also declined 6.6%, as a higher percentage decline in store sales was partially offset by an increase in sales through digital channels. Today’s sales are driven by various types interactions among customers, in-store personnel and digital media, so it is difficult to classify with pinpoint accuracy the breakdown between in-store and digital sales. Nevertheless, the 6.6% decline in net sales is a concern, even though it was only slightly below the company’s guidance.

Recent Share Price Performance

Despite delivering earnings within management’s guidance, BBBY shares gapped down on the earnings report and have pushed lower since. A weekly chart shows that the stock has continued its downtrend (which extends back to January 2015). Although this year’s late March-early April rally raised hopes that the stock was finally breaking out of its long-term decline, the subsequent sell-off has brought it to a new 52-week low. At this point, the stock is still in a downtrend. A reversal off a potential double-bottom is still a possibility, but today's decline reduces the odds of a sustained reversal at this time. Still, the relative strength index suggests that the stock is oversold.

New CEO, New Board of Directors

This was the first conference call for newly appointed interim CEO Mary Winston, who assumed the role following the resignation of Steven Temares on May 13. Mr. Temares had been BBBY’s CEO since 2003. Besides Ms. Winston’s appointment, BBBY has made significant changes to its Board since April, after reaching a settlement with activist shareholders Legion Partners, Macellum Advisors and Ancora Advisors, who collectively controlled about 5% of the outstanding shares. Since the settlement, the company has made the following changes to its board of directors.

• Lead director Patrick Gaston was appointed Independent Chairman of the Board;
• Five existing independent directors stepped down; the remaining four independent directors, including Mr. Gaston, continue to serve. Three of the four – all except Mr. Gaston – are relatively new to the Board, having been appointed in 2018;
• Co-founders Warren Eisenberg and Leonard Feinstein transitioned to new roles as Chairmen Emeriti and stepped down from the Board;
• Nine new independent directors have been appointed to the Board;
• The Board has formed a Business Transformation & Strategy Review Committee;
• It has also reconstituted the Audit and Compensation Committees; and
• The company has adopted a new executive compensation plan – with a higher percentage of total compensation now performance-based.

The Search for a New CEO and the Fate of the Existing Management Team

The changes in the Board raise questions about BBBY’s new CEO search and the fate of the existing management team. On the 19Q1 conference call, interim CEO Mary Winston said that the Board has hired a leading executive search firm and is seeking a leader with a “multi-faceted” skill set, including demonstrated experience in transforming retail organizations and in e-commerce and marketing. She made no mention that internal candidates would be considered, even though BBBY’s President and COO Eugene Castagna is a 25-year veteran of the firm and would have been an obvious choice to succeed Mr. Temares.