Bed Bath & Beyond’s New Financing Won’t Save It

At the end of last month, Bed bath and beyond (BBBY -8.76%) revealed a new plan to break out of an accelerating downward spiral.

Under the interim CEO of Sue Gove, the company plans to cut costs as much as possible, shift its product mix toward national brands to win back customers, close another 150 underperforming stores, and postpone virtually all long-term strategic investments. Meanwhile, Bed Bath & Beyond secured $505 million of new debt financing to shore up its liquidity.

By raising new financing and cutting expenses to reduce cash drain, management hopes to buy time to turn things around. Unfortunately, even these heroic efforts are unlikely to save the iconic home furnishings retailer.

Business is still horrible

Three months ago, Bed Bath & Beyond announced that comparable sales fell 23% year over year in the first quarter. That led to a net loss of $358 million and a quarterly cash burn of nearly $500 million. Management projected that sales trends would remain similar in the second quarter before improving in the second half of fiscal 2022.

Along with its late-August strategy update, Bed Bath & Beyond said the decline in its offset sales accelerated to about 26% in the latest quarter. Cash burn improved a bit to around $325 million, but is still extremely high by objective standards.

Management still expects sales trends to improve soon, but not by much. The company is now calling for an offsetting sales decline in the “20% range” for the second half of the fiscal year. That will almost certainly prevent Bed Bath & Beyond from becoming profitable again, despite its aggressive cost-cutting plans.

No quick fix available

Focusing on cost reduction is the right move for Bed Bath & Beyond as it offers the only plausible path to survival. That said, it will probably turn out to be too little, too late.

For example, Bed Bath & Beyond just completed a two-year program to close 20% of its namesake stores. Those closures have not had any noticeable positive effect on the company’s finances. The decision to close nearly 20% of the remaining Bed Bath & Beyond stores just after completing the previous downsizing highlights how store closures are more a symptom of a failed brand than a solution.

Image source: Author.

Additionally, cost cutting and capex will not fully address Bed Bath & Beyond’s cash burn. After all, the company burned through $325 million last quarter. Cutting quarterly spending by $200 million would buy some breathing room, but it still wouldn’t make the business sustainable.

Interest expense will skyrocket higher

The bulk of Bed Bath & Beyond’s new financing consists of a $375 million term loan with a variable interest rate that will start at approximately 10%. With the Federal Reserve likely to continue raising interest rates in the coming months, that interest rate could approach 12% by mid-2023.

Meanwhile, Bed Bath & Beyond took out $550 million on its revolving credit line during the first half of fiscal 2022. Those loans carry a much lower interest rate (about 4% today), but that too will increase as The Federal Reserve raises rates.

In all, recent loans from Bed Bath & Beyond could add about $75 million to your annual interest expense next year. That will complicate the company’s efforts to get back to breakeven or better.

Just a game of despair

There is only one plausible route back to profitability for Bed Bath & Beyond: a rebound in sales. But that will be virtually impossible to achieve if spending on home furnishings continues to slide.

Unfortunately, inflation remains very high, which will force many consumers to cut back on discretionary purchases. And the Fed’s moves to combat inflation by raising interest rates could tip the economy into recession next year. Given how many people invested in fixing up their homes during 2020 and 2021, buying more home-related items probably won’t be a priority in the years to come.

US consumer price index year over year chart

US Consumer Price Index (year-on-year change), data by YGraphics.

Even after its capital increase, Bed Bath & Beyond has just $1 billion of liquidity, down from $1.4 billion at the start of fiscal 2022. The company also plans to sell 12 million shares, but at current prices, that would only raise about $100 million. .

This cushion of liquidity gives Bed Bath & Beyond about a year to get sales and earnings back on track. Unless there is a surprising change in the macroeconomic environment, that time will not be enough. By the end of 2023, liquidity will likely drop back to critical levels, with $300 million of debt coming due in mid-2024, making bankruptcy virtually inevitable.

Leave a Comment