Key takeaways
- Bed Bath & Beyond stated it is considering bankruptcy in an announcement made Jan. 5, 2023.
- The stock has rallied since the announcement, up 58%.
- During its third quarter earnings call, CEO Sue Gove declined to answer analysts’ questions about the company.
Bed Bath & Beyond has struggled financially for years due to poor management decisions. While the home goods retailer was once a go-to destination for home furnishings, other retailers have stepped in with more choices and better prices. These poor decisions have led to the company announcing that bankruptcy is an option on the table. Here is how Bed Bath & Beyond got here and its options moving forward—plus how Q.ai can help.
Bed Bath & Beyond warns of bankruptcy
Announcing that it's running out of money and considering bankruptcy, compounds a disastrous year that saw the suicide of its CFO Gustavo Arnal, difficulty with paying its creditors and suppliers, the closure of almost a quarter of its stores, and the plunge in the value of its stock price. The sum of these issues spells doom for Bed Bath & Beyond unless it can develop a restructuring plan.
Ongoing issues
Bed Bath & Beyond has been experiencing financial difficulties for some time, and its woes predate the pandemic. In 2019, then-CEO Mark Tritton embarked on a strategy to develop and position in-house brands over national name brands. This effort came on top of previous efforts to improve retail sales and its relationships with vendors.
The biggest issue Bed Bath & Beyond faces is that it has seriously damaged its relationship with its vendors by making late payments and seeking to compete with them through private labels. As a general rule, retailers typically mix private labels with name brands to give consumers more choices, and the name-brand vendors work with retailers for favorable positioning of products on store shelves.
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Slow turnaround
In August 2022, the retailer announced plans to turn around the company's operations and return to profitability. That included ways to generate cash to pay suppliers, keep up with operating expenses and reinvest in the business.
The plans also strategized to get customers to return to the store apart from the company’s famous 20% off coupon, differentiate its merchandise from retailers selling the same or similar products, and recover from supply chain issues.
Bed Bath & Beyond also considered selling its buybuy BABY division, although it hasn't made a move to do so as of early 2023.
Short-term outlook
The near future doesn't look good for Bed Bath & Beyond in terms of avoiding bankruptcy. As it currently stands, the retailer is burning through its available cash reserves to keep its doors open. The retailer borrowed $375 million from investment company Sixth Street in August 2022, but it's facing difficulties getting another cash infusion from lenders.
In its third quarter earnings announcement, the reported a net loss of $393 million, which is more than the $385 million quarterly loss it projected a week ago. Sales at Bed Bath & Beyond were down 34% compared to the same period during the previous year. Sales in the buybuy BABY division declined in the low 20% range year over year. The company did not disclose sales at Harmon Stores, its health and beauty chain.
The good news from the call is that the retailer is still on track to close 150 stores this year and that operating expenses have decreased from $698 million a year ago to $583 million. This shows the company is working to reduce costs as it tries to survive. It also noted that its Welcome Rewards membership program added roughly 10 million new members.
To pull through, Bed Bath & Beyond needs to improve its retail offerings, attract customers to the store and show lenders that it can operate profitably and reliably. As things currently stand, some vendors are not shipping products to the store in quantity, while others aren't shipping products unless they are paid upfront.
One potential avenue for survival could be to close out the Bed Bath & Beyond brand and focus solely on buybuy BABY. After Babies R Us went out of business, the retailer became the only brick-and-mortar option for parents focusing exclusively on children's items. While discount retailers like Walmart and Target offer baby and children's clothing and furnishings, buybuy BABY has a much wider selection, especially regarding furniture and car seats. Some analysts value the buybuy BABY brand at $1 billion.
The future is not looking good for Bed Bath & Beyond. If the retailer can't work out a restructuring plan that restores the confidence of its suppliers and brings down its debt balance, then bankruptcy or a sale are its only options. The warning of bankruptcy as an option was issued on Jan. 5, 2023, but no additional news has been announced as of Jan. 10, 2023. This includes the earnings call, where the only comment CEO Sue Gove made regarding it was that the option is still on the table, but the company is working hard to avoid this scenario. She did not take any analysts’ questions during the call.
Impact on the stock
The news concerning a potential bankruptcy was announced on January 5, causing BBBY stock to fall 30% to $1.31 by the end of the day. With no additional news about bankruptcy in the subsequent days, the stock price has moved up. Since hitting its low on January 6, the stock has rallied 58%. It is unclear whether the increase in stock price is due to institutions buying in or retail traders looking for a short-term bounce to profit from.
The most likely scenario is a quick buy-up by retail investors, as BBBY has become a meme stock in the same vein as Gamestop and AMC. By purchasing the stock and call options, they are hoping to hurt hedge funds that are shorting the stock.
However, short sellers are still buying up the available float in anticipation of bankruptcy. As of Jan. 9, 2023, the company had 57.13% of its float shorted with a short interest of 37.48 million shares.
Investors must understand that if the company declares bankruptcy and the stock price drops to zero, there is little to no recourse for equity holders. In the event of bankruptcy, debt holders are first in line, and it is extremely rare for equity investors to recoup any lost money.
The bottom line
Bed Bath & Beyond is facing many issues, and bankruptcy looks like the only realistic option at the moment. There could be a situation where a bank or private equity group comes in to save the day, but for this to happen, Bed Bath & Beyond would likely need to sell some assets or completely restructure the company. It will likely not survive going forward in its current form without a major overhaul or lending miracle.
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