A trio of activist investors thinks Bed Bath & Beyond Inc.'s business model has gotten sleepy and plans to give the big-box retailer a wake-up call. The move sent shares soaring.

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Ticker Security Last Change Change % BBBY BED BATH & BEYOND INC. 13.36 -0.55 -3.96%

Three activist funds -- Legion Partners Asset Management LLC, Macellum Advisors GP LLC and Ancora Advisors LLC -- together control a roughly 5% stake in Bed Bath & Beyond and are preparing to launch a proxy fight to replace its entire 12-person board, according to people familiar with the matter.

The group contends Bed Bath & Beyond has failed to adapt as consumers increasingly shop online or expect unique experiences in bricks-and-mortar stores, the people said. The retailer has allowed its costs to increase, they said, resulting in shrinking margins over the past several years.

The investor group wants the retailer, known for its large stores packed with bedding, towels, kitchen trinkets and other home goods, to better curate its merchandise and consider selling noncore brands such as Buy Buy Baby and Cost Plus World Market to focus on its core business, the people said.

Late Tuesday, the company fired back, noting it has held discussions with two of the three activists Legion Partners Asset Management LLC and Macellum Advisors GP LLC.

"In these conversations, we made clear our commitment to engaging constructively and acting in the best interest of all Bed Bath & Beyond shareholders. We asked on several occasions for their suggestions and ideas for improving the Company's business but they did not provide any. We also invited them to participate in the Board refreshment program we have been undertaking in recent years and are in the process of accelerating with investor input. Instead they chose to publicly attack the Company and provide their intent to nominate directors to take over the full Board. Unfortunately, while our directors and management were seeking to engage in good faith, it appears that the Legion and Macellum representatives were merely seeking information to support their attack. Bed Bath & Beyond is undertaking a comprehensive transformation to evolve the foundational structure of the business, drive shareholder value and best position the Company for long-term success..." - Bed Bath & Beyond Inc. Issues Statement Regarding Activist Investor Group

The activisits also want to replace Chief Executive Steven Temares, who has led the company since 2003, they said, and better align compensation with performance.

The group's 16 director candidates include former Gap Inc. executive Jeffrey A. Kirwan, former Pier 1 Imports Inc. CEO Alexander W. Smith and Macellum founder Jonathan Duskin, the people said.

Bed Bath & Beyond's shares are down 35% over the past year, compared with the S&P 500's 8.1% rise, and its same-store sales have dropped in each of the last seven quarters, according to FactSet.

The company has recently said it is prioritizing profitability over sales growth and that some of its actions, such as removing less-profitable items and altering its free-shipping policy, could hurt sales in the near term but should improve profitability over time. The company has been updating its online shopping platform and is testing in-store changes in several dozen Bed Bath & Beyond stores, such as adding more seasonal items, cutting back on inventory and updating displays.

Mr. Temares said on the company's most recent earnings call in January that early results from some of those stores are promising, and the company's shares rose more than 16% the following day after it said it was ahead of schedule in reducing declines in operating profit. The company is slated to report its fiscal fourth-quarter earnings April 10.

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Bed Bath & Beyond was founded by Leonard Feinstein and Warren Eisenberg in 1971. The two men are longtime board members and co-chairmen and control roughly 2.7% of the company's shares, according to FactSet.

Legion, Macellum and Ancora all tend to agitate at small companies. California-based Legion was seeded by the California State Teachers' Retirement System and previously urged Perry Ellis International Inc. to sell itself. New York-based Macellum focuses on retail investments and previously settled with Children's Place Inc., while Ohio-based Ancora has gained a board seat at sandwich-chain Potbelly Corp.

*Updated on 3-26-19 to include Bed Bath & Beyond's response.