Buyback Bloodbath & Beyond: How BBBY Lost $1.7 Billion Buying Back Its Own Stock

We have been following the slow at first, and now very fast-moving disaster that is Bed Bath And Beyond with close interest for years, at first with detached amusement (Bed, Bath & Beyond Buybacks Authorizes Another $2 Billion In Stock Repuchases) and increasingly with amazement, as the company launched an unprecedented stock buyback spree to mask the relentless deterioration in its underlying business.

Last September when looking at the chart showing BBBY's buybacks vs its capex expenditures, shortly after Q1 BBBY issued $1.5 billion in senior unsecured Notes promptly using $1 billion of this to buyback its own shares, we presented the following three questions:

  1. WTF
  2. Is the entire management team about to quit, but not before cashing out of their equity-linked securities first?
  3. See 1.

Reading between the lines, what we asked was "what glaring business weakness is the management team covering up so earnestly with this constant stream of buybacks?"

To be sure, in 2015's BBBY buybacks slowed to a trickle as the update chart below shows...

 

... which led to two things: i) a relentless decline in the BBBY stock price over 2015 as the management team no longer had the wherewithall to defend it,  and ii) last night's inevitable guidance hammer, in which the management team provided an "update of anticipated comparable sales." It was a bloodbath:

Bed Bath & Beyond Inc. (NASDAQ: BBBY) today announced preliminary information for the fiscal third quarter ended November 28, 2015, which included the Thanksgiving holiday as well as the following two shopping days (Black Friday and Saturday), and provided an update on anticipated comparable sales from the beginning of the fourth quarter through Christmas.

 

Although it is still in the process of its quarterly financial close, the Company now estimates net sales for the fiscal third quarter to have been approximately $3.0 billion, an increase of approximately 0.3% from the prior year period.  The Company had previously modeled net sales to increase by approximately 1.8% to 4.0%.

 

The Company now estimates third quarter comparable sales to have decreased by 0.4%, or relatively flat on a constant currency basis(a non-GAAP measure).  The 0.4% unfavorable impact of foreign currency fluctuations is consistent with its previous model.  Including the impact of foreign currency fluctuations, the Company had previously modeled comparable sales to increase between 1.0% and 3.0%.

 

Based on the lower-than-modeled sales results in the third quarter, the Company now estimates fiscal 2015 third quarter net earnings per diluted share of approximately $1.07 to $1.10, as compared to the Company's previous net earnings per diluted share model of approximately $1.14 to $1.21.

Perhaps it was too warm... or too cold? Or perhaps it was something far simpler: as we reported two weeks ago, using BofA credit and debt card data, November was the first month to see an annual decline in retail sales since the recession.

In other words, the US consumer is indeed tapped out, as BBBY's earnings preview confirmed.  The result: BBBY's stock just tumbled to levels not seen in nearly 5 years,.

But what is more relevant is that now we know precisely why management, not just BBBY's but every other company, was so eager to engage in record buybacks. Without them, the stock would have been at today's price long, long ago.

How many buybacks? The chart below shows the average buyback price since the last time BBBY traded at $49. The answer: $67.44.

 

Or, in return terms, since the start of 2011, BBBY's management spent $6.5 billion to repurchase its own stock, while leverng up to the hilt. It has so far generated paper losses of $1.7 billion: a return which would have gotten any trader or hedge manager not only fired but expelled from the industry for ever.

Putting these numbers in context, BBBY repurchased 80% of its current market cap, which as of this moment is $8.1 billion. One wonders where the stock price would be without this Fed-enabled feat of financial engineering...