Activist investors want to clean house at Bed Bath and Beyond

Company's stock has lost more than 80% since 2015

Kevork Djansezian/Getty Images

Activist investors want to shake up Bed Bath & Beyond, which has fallen behind rival retailers in recent years.

Three activist funds said on Tuesday that they have built a roughly 5% stake in Bed Bath & Beyond and will attempt to replace the company's entire 12-member board of directors and its chief executive. The activist group has nominated a full suite of 16 new board members and plans to recruit a new CEO. The Wall Street Journal first reported the group's plans.

The activist group sees an opportunity to push for changes because Bed Bath & Beyond's stock has lost more than 80% of its value since 2015. Bed Bath & Beyond's same-store sales have also fallen two years in a row.

The group — Legion Partners, Macellum Advisors, and Ancora Advisors — blames cluttered stores and a confusing pricing strategy for Bed Bath & Beyond's prolonged slump.

"Stores contain a dizzying array of too similar items and lack the experience customers demand," the group said in a news release on Tuesday. It argued that Bed Bath & Beyond lacked a "clearly defined 'good, better, best' strategy" on merchandise at different prices. That's key to attract a broad range of shopping demographics.

The group wants Bed Bath & Beyond to trim its product selection and beef up the in-store experience to drive traffic back to stores.

Bed Bath & Beyond's shrinking profit margins also came under attack. Here, the group argued that Bed Bath & Beyond did not sell enough of its own private-label brands, which carry higher margins than outside brands, and the retailer relied too heavily on promotions.

To improve margins, the activist group proposed cutting costs and possibly selling Bed Bath & Beyond's "non-core businesses," such as online home decor website One Kings Lane.

Bed Bath & Beyond's stock rocketed up around 25% Tuesday, signaling that Wall Street supports an overhaul.

The home furnishings' chain has struggled to compete with traditional retailers such as Walmart and Target, as well as online retailers Amazon and Wayfair. Walmart, Target and Amazon have launched cheaper private label home brands, while Wayfair has spent heavily on advertisements to get customers familiar with its brand. On Tuesday, Wayfair said it will open its first brick-and-mortar store this fall.

Bed Bath & Beyond is facing pressure from discounters TJ Maxx and its HomeGoods arm, too. "We still see an enormous opportunity to grow," TJX CEO Ernie Herrman said last month of HomeGoods. The chain plans to open 65 new stores this year.

Competition has swallowed up other home decor chains. Specialists such as Z Gallerie and Heritage Home have recently filed for bankruptcy, while Pier 1 Imports has fallen under $1 a share.

Despite the tough competition, the activist group says there's still hope for Bed Bath & Beyond. The company just needs new leaders and a fresh game plan.

"Bed Bath has tremendous potential with the right board and management team in place," the investor group said. "Shareholders must demand change now before the [company's] failures become irreversible."

In response to the activist push, Janet Barth, vice president of investor relations at Bed Bath & Beyond, said "we are open to the views of our shareholders and value constructive input."

Barth said Bed Bath & Beyond is already making progress on transforming the company. The company is eliminating some merchandise from stores to reduce clutter and focusing on winning college students and their parents with an improved assortment.

Bed Bath & Beyond will also launch six home furnishing brands in the next two years. The first of those brands, Bee & Willow, debuted earlier this month.

—CNNBusiness' Jordan Valinsky contributed to this article.

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