The Beverly Hills-based activist who is spearheading the turnaround of Bed Bath & Beyond, Inc. (NASDAQ: BBBY)says investors can expect new highs as his plan to reinvigorate the struggling retailer gathers pace.
Christopher S. Kiper, 48, co-founder and managing director of seven year-old Legion Partners who previously worked for the Disney family’s Shamrock Capital Advisors, is convinced the true value of the stock has yet to bear fruit.
Kiper, the exceptionally astute small-cap focused activist, talked exclusively toThe Edge(who source underperforming companies for activist involvement, Special Situations and Spinoffs) and revealed his team of six performed “around-the-clock” work as they completed their 168-page report to the board, which was a resounding success.
In May 2019, they ousted Steven Temares, who joined Bed Bath & Beyond as Director of Real Estate and General Counsel in 1992 before becoming CEO in 2003. He will be replaced by Target's Mark Tritton on November 4, 2019.
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Chris said, “We first began buying shares in early 2019 and the deep-dive operational plan we shared is a road map for putting it onto a path for improving its customer experience and financial performance.
“While the plan is complicated, it is not a reinvention of retailing, but rather a plan which relies on implementing modern retailing practices that have been adopted by many of Bed Bath & Beyond’s peers.
“We believe the new board and management are helping to instill a far better culture at Bed Bath and we think this goes a long way toward supporting their return to greatness.”
Chris and fellow investors, including Macellum and Ancora, set about making a compelling case. He added, “For us, Bed Bath & Beyond was a terrific company that had not performed well for years.
“The business had produced declining returns and there were readily available fixes.We brought in a world-class consulting firm to validate the operational upside.
“In our view, Bed Bath & Beyond will flourish under new leadership.The recent pick of Mark Tritton, the former Chief Merchandising Officer at Target, has made us even more optimistic about the company’s long-term potential.
“Mark is top talent and we couldn’t be more thrilled he is joining to lead Bed Bath & Beyond forward.
“One of the less understood points about Bed Bath & Beyond is the fact that they have so many non-core assets on their balance sheet.The board of directors has been focused on monetizing these assets and simplifying the Bed Bath & Beyond business.
“These moves will significantly de-risk the investment and give more time for the numerous strategic improvements to bear fruit. To put some context around the overall valuation, the enterprise value of Bed Bath & Beyond today is roughly $2 billion.
“In our estimation, the non-core assets of Bed Bath & Beyond are worth roughly $2 billion.This means that the market is attributing nearly zero value to the roughly 1,000 Bed Bath & Beyond stores which we estimate should produce at least $500 million of EBITDA.
“In addition, Bed Bath & Beyond management recently announced an effort to reduce inventory by $1 billion over the next 18 months which will further provide additional cash.”
How Legion Executes As An Activist
Working for the Disney family’s Shamrock Capital really opened Chris’ eyes to the world of activism, and he’s been able to introduce that knowledge to how Legion Partners operates.
He said, “Shamrock was a great place to work with some real activist legends that had been engaging boards and management teams for decades.
“It had really refined the model of working collaboratively behind the scenes to drive change and then running an all-out PR campaign when the behind-the-scenes efforts were not working.
“We’ve built on those lessons in arriving at our own brand of activism.The biggest challenge at Shamrock was the death of Roy Disney – he was really the glue that held the place together.”
Legion looks for stocks that have become severely dislocated from their intrinsic value. They have a proprietary monitoring framework tracking over 700 targets with market capitalizations below $5 billion, and they never cease to look for investment ideas.
Chris added, “Legion Partners executes its activist strategy in a professional and long-term oriented manner, which we believe lowers our risk profile, and is more effective and sustainable.
“It is undeniable that activist strategies entail some degree of conflict.However, we believe that our methodical and long-term oriented approach to engagement balances the situations in which we must be more assertive in a manner that helps ensure success with the minimal level of disruption.
“We believe that key constituencies (like other shareholders, proxy advisors, media, and even other companies) recognize situations exist in which shareholders must take action to protect their interests and appreciate a professional approach over other highly aggressive tactics.”
Stealth Activism
Making headlines might be the raison d’être for some big name activists, but Chris is absolutely convinced that Legion is a firm that can get results without creating uproar.
He continued, “In most instances, our engagements are conducted in private with our portfolio companies. We approach each situation with the objective to provide advice and guidance to our companies that they can take the lead on implementing and executing.
“We view this approach as a lower risk and more sustainable business model.This approach has manifested itself in many ways, but an excellent example is the fact that Legion Partners has successfully negotiated a total of nineteen individuals on the board of directors at nine of our portfolio companies just in the last approximately twenty months.
“In most instances this was accomplished with little to no publicity (except the required regulatory filings once the appointments were completed).”
Legion Activism Stocks
Over the past year Legion has made a number of plays, and Chris explains what companies they have been involved in and his retrospective analysis of each.
Primo Water Corporation (NASDAQ: PRMW)
Primo WaterCorporation is North America's leading single source provider of multi-gallon purified bottled water, self-service refill water and water dispensers sold through major retailers throughout the United States and Canada.
Chris said, “We were initially attracted to Primo’s business due to attractive secular growth drivers supporting increased water consumption and the need for high quality filtered water solutions in the US due to an aging water infrastructure.
“In addition, Primo’s virtual monopoly in the refill space makes it an optimal investment to benefit from this over-arching thematic.
“As we’ve continued our research and engagement with the company, we see an enormous opportunity to improve execution and retail distribution to dramatically improve the earnings power of the business and accelerate growth.
“This important topic, along with governance-related changes, have been a key focus in our interaction with the company.”
Edgewell Personal Care (NYSE: EPC)
Edgewell Personal Care is an American consumer products company headquartered in Shelton, Connecticut. The company was formed in 2015 following the corporate split of Energizer Holdings.
Chris revealed, “Edgewell owns a valuable portfolio of personal care brands, including Schick, Banana Boat, Hawaiian Tropic, and they have been mismanaged historically.
“We recognized a substantial opportunity to upgrade management at the company and achieve significant efficiencies through removing layers of bureaucracy.
“During our investment, the company hired a new CFO and began aggressively attacking their cost structure through an initiative to deliver more than $200 million in savings.
“In late 2018, we entered into a cooperation agreement with the company, adding two new board members.However, shortly thereafter having taken notice of accelerating competitive headwinds in the shaving category, we decided to exit our position, having executed much of our agenda.”
Nutrisystem (NASDAQ: NTRI)
Nutrisystem, headquartered in Fort Washington, Pennsylvania, is a commercial provider of weight loss products and services.
Chris said, “Nutrisystem is a leading eCommerce company that sells consumers diet plans that are highly effective for losing weight and managing diabetes.
“Given the obesity epidemic facing our country and an asset light eCommerce focused distribution model, the company benefited from a number of growth tailwinds historically.
“However, a rising tide lifting the industry masked a tremendous opportunity to accelerate growth and improve operating margins through evolving the company’s marketing approach and internal ad tech.
“Based on detailed research and engagement with management, we understood the company was still spending approximately three quarters of their marketing budget on traditional linear TV advertising, resulting in customer acquisition costs that were atrociously higher than any other eCommerce peer we’ve come across.
“We brought the company a leading digital advertising consultancy to help them optimize marketing operations, upgrade their ad tech infrastructure, and develop and execute a modern digital advertising strategy.
“By modernizing their roughly $200 million annual marketing spend, we believed this would have dramatically improved unit economics (lifetime value and customer acquisition cost) and overall profitability.
“Soon after we appointed two technology experts to the board and mandated the hiring of the aforementioned consulting firm, the company was acquired by Tivity Health for $1.3 billion.”
Legion Partners has an exciting portfolio, and its boutique team was listed as #5 of 10 in The Activist Investing Annual Review 2019. For more information, contact them atinfo@legionpartners.com.
