The Ratings Game: Bed Bath & Beyond Upgraded Twice, Shares Soar After Investor Activism Revealed

Bed Bath & Beyond Inc. was upgraded at least twice after a report that activist investors are preparing a proxy fight to replace the entire 12-person board.

The three activist groups - Legion Partners Asset Management LLC, Macellum Advisors GP LLC and Ancora Advisors LLC – own about 5% of the struggling home retailer.

According to The Wall Street Journal, the investors want Bed Bath & Beyond BBBY, +21.99%   to improve the assortment and consider selling two of its chains, Buy Buy Baby and Cost Plus World Market, in order to focus on the primary business.

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Reports of the activism sent shares soaring nearly 22% in Tuesday trading, the one-day biggest percentage gain since April 2009.

Bed Bath & Beyond issued a statement Tuesday afternoon, saying that while they have spoken with Legion and Macellum over the past few weeks, they’ve never engaged with Ancora.

“We asked on several occasions for their suggestions and ideas for improving the company’s business but they did not provide any,” the statement said. And rather than participating in the “board refreshment program” that has been ongoing in recent years, “they chose to publicly attack the company.”

Bed Bath & Beyond claims that it is addressing many of the issues the activist group has broached.

“It takes time to transform a company and the initiatives we have underway are delivering results,” the statement reads.

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The company reported better-than-expected earnings in the most recent quarter, and shares are up more than 49% in 2019, outpacing the 12% gain for the S&P 500 index SPX, +0.72%  .

KeyBanc Capital Markets had an underweight rating on Bed Bath & Beyond stock for more than three years, but upgraded shares to sector weight after news of the activism.

And Raymond James upgraded its rating to strong buy from market perform, “highlighting a case for going private” in a Tuesday note. Analysts think an initiative to go private or a transaction will take place sometime around the fiscal fourth-quarter earnings announcement, which is scheduled for April 10.

“Irrespective of the elevated capital investment of the past several years, (mostly in digital technology and fulfillment) management has been slow to invest in its stores,” analysts led by Bobby Griffin wrote. “And although a Next Generation store initiative is underway, the current leadership – despite assertions otherwise – is moving far too slowly for our taste.”

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On the topic of leadership, Raymond James says their “irritating lack of transparency” is “the most difficult issue facing all investors.”

Wells Fargo maintained its underperform stock rating and $13 price target in a Tuesday note, sensing that there’s a long road ahead with no guarantees.

“For FY19, we continue to view guidance as aspirational with or without an activist campaign, with comps unlikely to inflect positively and ongoing margin compression,” wrote analysts led by Zachary Fadem.

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