Last month, Bed Bath & Beyond (BBBY, Financial) escaped bankruptcy by striking a deal to issue new equity to raise $1 billion. On Feb. 6, the company successfully completed the deal, received $225 million and announced that another $800 million will be received in installments in the future. The company said that the funds will be used to settle outstanding debt repayments under the company’s credit facility, thereby opening the doors for Bed Bath to reborrow under its amended credit facility.
This transaction, by all means, has saved Bed Bath investors from a catastrophic fall as the company would have been forced to file for bankruptcy protection without an immediate cash infusion. Commenting on the importance of this transaction and how it sets the company up for a successful turnaround, Bed Bath CEO Sue Gove said:
"This transformative transaction will provide runway to execute our turnaround plan. We continue to put our customers at the center of every decision, positioning Bed Bath & Beyond to meet and exceed their expectations, while resetting our foundation for near- and long-term success. We are optimizing our store fleet and supply chain and continuing to invest in our omni-always capabilities. This will enable us to better serve our customers, and grow profitably, by directing merchandise where and how they want to shop with us."
Although the company has survived bankruptcy for now and remains optimistic about what the future holds, I believe investors need to be wary of this troubled furniture company as a successful turnaround seems a distant prospect.
The struggles continue
In an SEC filing on Feb. 6, the company laid down several goals for 2023 to steer the company in the right direction.
- Expanding fleet optimization program to 400 stores.
- Closing down additional 150 Bed Bath & Beyond stores in addition to the 200 store closures announced earlier.
- Improving the inventory position.
- A reduction of $1 billion in selling, general and administrative expenses.
The company’s strategy, as evident from the above financial goals, is to cut costs to the extent that operating margins will finally trend in the right direction. This strategy, however, might limit future growth opportunities substantially, though the company has no option but to focus on transforming to a leaner business model amid intensifying competition from e-commerce giants including Amazon.com Inc. (AMZN, Financial).
On Feb. 13, court filings revealed that Bed Bath is planning to move out of Canada by closing its stores under both the Bed Bath & Beyond brand and the buybuy BABY brand. These store closures have the potential to improve investor sentiment in the short run as these are part of the company’s turnaround strategy but in the long term, Bed Bath’s continued loss of income-producing assets could come back to haunt investors.
Bed Bath has been one of the most beloved brands in the United States, with the company rising to the top as a leading home goods retailer in the country. The company gained popularity because of the large selection of products catering to the interests of every consumer. Back in the ‘80s, the company revolutionized the department store category by launching the superstore concept, where consumers could find all the products they could imagine under one roof. In contrast, many of its department store counterparts had limited items for sale in each of their locations. This differentiation was one of the main reasons behind Bed Bath’s initial success that paved the way for the company to become a household name.
The company’s struggles began with the rising popularity of online shopping. The rise of cross-category megastore chains such as Walmart Inc. (WMT, Financial) did not help the company’s fortunes either. Many of Bed Bath’s earlier rivals, including its arch-rival Linens ‘n Things, went out of business with the rise of e-commerce, but Bed Bath has been able to survive so far because of the massive brand value associated with the company. The continued closure of physical stores, bankruptcy rumor, and the expanding product lines of e-commerce players are likely to result in a notable deterioration of brand value in the coming quarters.
Liquidity issues might resurface soon
A closer look at the company filings reveals that Bed Bath was forced to use the recently raised funds to satisfy debt repayment obligations. Although this has allowed the company to remain in operation for the time being, raising money to repay debt is not a sustainable strategy, nor is it a strategy that would add value to long-term shareholders. The expected $800 million in installments is not a guarantee at the moment, and the company is unlikely to bring in any operating cash inflows for the time being as well. For context, Bed Bath has reported operating cash outflows in three of the last four quarters. Commenting on the liquidity position of the company, Wedbush analyst Seth Basham wrote:
"As we see a low probability that the company achieves its 2023 turnaround plan, we ascribe little-to-no value to the company’s equity on a probability-weighted basis. Failure to secure the additional $800m and/or an unsuccessful turnaround in 2023 could put the company back on bankruptcy’s doorstep."
Takeaway
Bed Bath & Beyond avoided a close call last month, but the company is not out of the woods just yet. With its core business struggling to take off again, cost-reduction plans alone will not drive shareholder returns in the long term. Although Bed Bath stock might see short-lived gains due to the meme stock phenomenon, the company does not seem an attractive opportunity for long-term-oriented value investors.
