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Not every executive has a company's best interests at heart. A new CEO and a new direction doesn't always mean a brighter future...
By now, everyone with a passing interest in markets knows that Bed, Bath & Beyond (BBBY) was a pandemic meme stock that finally went bankrupt this year.
However, not everyone realises just how long cash was being extracted from this company...
Ben Hunt at Epsilon Theory did an incredible piece on this. It's a tale of insanity that started nine years ago! 👇
In 2014, as cash operating margins declined 200 bps and cash from operations declined 15% and free cash flow declined 20% from the year before, Bed Bath & Beyond borrowed $1.5 billion and bought back $2.2 billion in stock.
Over the next five years, until CEO Temares was fired and founders Feinstein and Weisenberg were kicked off the board in May 2019, Bed Bath & Beyond bought back an additional $2.2 billion in stock even as cash operating margins went from 12% to 5% (I mean … good lord) and free cash flow declined by 70% from the FY 2014 high water mark.
Over the 6-year period of Bust Out 1, the board and management of Bed Bath & Beyond spent $4.4 billion buying back their own stock on total free cash flow of $3.6 billion. As their stores deteriorated and their margins collapsed, this company spent ALL of their free cash flow and then $800 million MORE buying back stock.
What did that mean for then CEO Steve Temares?
In sum, Steve Temares received well in excess of $200 million in cash from Bed Bath & Beyond shareholders, the majority of this during or after Bust Out 1.
And that's barely scratching the surface of what's gone on... So many lessons to be taken just from this one instance. Without doubt one of the best notes I've seen this year. Give it a read 👇
One thing that Ben touches on is the acceptance of this 'griftiness' as fair game, just something that happens in America, almost an institution in it's own right.
Corporate raiders are supposed to be good for companies. They identify undervalued companies, acquire shares, force change via the removal of poor management.
Sometimes it works. Other timess, you get a BBBY outcome where the execs are rewarded for failure...
This is about way more than buybacks. It's about extracting the value from companies at the expense of others (such as the shareholders).
When Apple buys back their stock, it's different. There genuinely aren't any better uses for the insane amount of cash flow the business generates and doesn't stop them investing in new ventures.
Apple's rate of buybacks has stayed high even as the company launches high yield savings accounts and Apple Pay Later, adding more services for an already loyal customer base.
Not all buybacks are equal. Context matters 👇
Over the last few years there has been a lot of press, pundit, and political attention paid to share repurchases, much of it critical. Most repurchase critics assert that share repurchases are at historical highs, and that dollars spent repurchasing shares would otherwise be directed towards profitable investment.
In fact, the true impact of share repurchases is difficult to estimate, and any estimate requires far more nuanced analysis than has been offered
A lot of the time, everything's true. Buybacks can be used as an efficient way to return excess cash to shareholders, and they can also be used and abused as a way to fleece shareholders without too many of them noticing what's going on.
Likewise, they can neutralise the impact of stock-based compensation, ensuring that existing shareholders aren't diluted by the issuance of stock to company employees.
Memestocks are an entirely different beast. Clue's in the name.
It's deeply unpleasant, especially for the uninformed who buy into the story and overlay their very own hero redemption arc, but CEO's have fiduciary duties to generate as much cash for the biz as possible, even as it falls into bankruptcy. 👇
Part of the value of Bed Bath & Beyond is that it is a meme stock with retail shareholders whom harsh economic reality cannot deter from buying the stock. That value belongs to the creditors now!
AMC hasn't fallen into bankruptcy (yet). Even though their (evil?) genius workaround to dilute shareholders might change laws for the better, there's still plenty of reasons NOT to buy their stock. 👇
The pandemic period took us beyond the limits of belief and credibility, proving beyond all doubt that 'anything can happen and it probably will'. That's over now, or at least, it's in the process of ending.
The low rate era preceding Covid allowed all kinds of weird ideas to proliferate. Things like 'growth at any cost' (even if that 'cost' was the acceptance of no profits as normal). There's always a balance between growth and profitability. Now the pendulum is swinging back the other way...
Profitability has always mattered. Now, it's becoming the focus again.
Purplebricks was once valued at £1.4bn... 👇
Consolidation, acquisitions & bankruptcies are all on the rise...
Rising interest rates tend to uncover the extent of the grift & reveal the shaky foundations that questionable beliefs are built on.
It's a healthy part of the capitalist process. As in nature, the weakest don't survive, the herd is trimmed, and the world keeps turning.
It's usually a painful process. If that means turning the page on an era of grift and bezzle, isn't that a price worth paying?
Ben Hunt is hopeful (but not optimistic) that once reality is laid bare for all to see, the game will change...
I am hopeful that the reality of the American bust-out — crappy institutions and crappy leaders and overwhelming debt ending in failure — will similarly encourage weak men and rapacious men alike to see beyond the narratives of political game-playing and control.
Hope springs eternal.
I'm still wrestling with the idea of imminent generational change in societies. Maybe even generational 'warfare'.
It's clear that the current system is flawed and probably untenable (what's new? the cynic asks). Could the balance of power shift towards the younger generation?
We'll save that for tomorrow...