(1) I recently decided to do some trench work on $BBBY as a possible turnaround play. The stock is down over 80% from its 2015 peak and, on the surface, boasts some interesting metrics:
(2) The stock sells for a mere 0.16X sales, 0.66x book, 5X earnings, and 2.4X cash. Despite recent trouble, the company also produces a 14% ROE and pays a 4.6% dividend. None of these numbers matter, however, if sales continue to decline. So what is holding back sales?
(3) Boots on the ground, a visit to a couple locations gave me some answers. My first impression was how cluttered the stores are. Being a bit of a neat freak, I felt uncomfortable and almost left from the start. However, I was there to study and so pressed on.
(4) Apart from the clutter, two really big faults jumped out at me. First, many items are hung high up a wall display, well out of reach of the consumer. To purchase those products, a customer would have to locate an employee who could retrieve the item.
(5) Now think of this from the behavioral perspective. If a customer is not sure of purchasing the item, is he/she really going to track down an employee and ask him to climb a ladder just to have a look at the item? Lost sale.
(6) Even if a customer knows he/she wants that item, many people are too shy or too annoyed to have to find assistance in getting the product off the shelf. Lost sale.
(7) Second, a large amount of floor space is dedicated to "pharmacy" items: pain killers, vitamins, toothpaste, shampoo, etc. This area was devoid of shoppers, likely because $BBBY prices are not competitive with Target, Walmart, or big grocery chains.
(8) And if you're not moving product, you're wasting rent and locking up cash in stale inventory. Why carry items for which you are not competitive? Remove those items, and use the space to reduce clutter and put products within physical reach of the consumer.
(9) Despite these faults, I almost made a purchase. $BBBY was running a wicked sale on some of my favorite K-cups. However, when I went to pay, the line was 12-deep with only one register open. Lost sale. Oh, well.
(10) My rapid assessment: $BBBY can be salvaged, but only if management focuses on improving the direct user experience rather than tinkering with their coupons or trying to drive sales through the web site. Until I see steps in that direction, I'll take a pass on the shares.
