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Is Bed Bath & Beyond Bracing for Bondholder Battle?

Less than a week after reporting another quarter of double-digit sales losses, troubled home goods retailer Bed Bath & Beyond has become the focus of both analysts and investors speculating on the company’s increasingly cloudy future.

Bed Bath & Beyond bondholders are taking action to protect their investments as the home goods retailer continues to struggle with declining sales.

According to a report in the Wall Street Journal, unnamed sources with knowledge of the matter said financing adviser Perella Weinberg Partners is working with holders of unsecured notes due in 2024 from Bed Bath & Beyond. That move is ahead of debt talks expected to be held with the Union, N.J retailer.

Last week, Bed Bath & Beyond said during its second-quarter earnings call that it’s considering the launch of a distressed exchange that would replace outstanding bonds for new, longer-term debt or equity in the company, based on trading prices. But according to a securities filing last week, Bed Bath & Beyond said the transactions could take other forms or not be initiated.

While neither Bed Bath & Beyond nor Perella Weinberg have commented on the situation, the Wall Street Journal reported people familiar with the situation said bondholders are concerned about a potentially coercive exchange deal that raises new secured debt while weakening other creditors’ claims on the retailer’s assets.

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Though Bed Bath & Beyond recently secured $500 million in financing for incremental liquidity, including an expanded asset-based loan facility of $1.13 billion and $375 million in the form of a first-in, last-out loan, many analysts and investors remain dubious of the retailer’s ability to right the ship.

Goldman Sachs analysts pointed to a 26 percent comp decline in the second quarter, a 28 percent drop in store comps and a 22 percent dip in digital comps as evidence that the chain’s efforts to reverse losses haven’t made a difference.

And while Goldman Sachs analysts acknowledge Bed Bath & Beyond has made progress in regulating its inventory, second-quarter declines coupled with the retailer’s double-digit comp decline outlook for fiscal 2022 spurred them to lower estimates for the company.

“We are lowering our fiscal year adjusted EBITDA estimate to $470 million from $326 million due largely to expectations for continued lower same-store sales with softening demand trends across the home furnishings industry, along with a gross margin decline amidst a promotional environment,” they said. “Additionally, we are decreasing our fiscal year 2023/2024 adjusted EBITDA estimates to $28 million/$64 million respectively.”

UBS took an in-depth look at Bed Bath & Beyond’s store closings to analyze trends that have contributed to the company’s sales woes. The UBS Evidence Lab analysis found that closings reflect population migration, unfavorable demographics and rising competition.

The initial list of more than 50 store closings—out of 150 slated to shutter—is concentrated in coastal and Midwest markets and states that have seen net population migration outflows. Bed Bath & Beyond is closing 43 stores in Iowa, Illinois, Ohio, Michigan, Connecticut, Massachusetts, Nevada, New York, Minnesota, California, Oregon, New Jersey and Arizona. But notably, the retailer is only closing two out of 60 stores in both Florida and Texas.

Shopping center demographics play a role in closures, as well. According to the UBS Evidence Lab analysis, Bed Bath & Beyond is closing locations that have an average population of 40,500 within a five-minute drive. These areas have a -5.6 percent lower population compared to Bed Bath & Beyond stores that will remain open.

Bed Bath & Beyond also is closing stores that face greater competition from mass merchants, particularly Walmart, Target and HomeGoods. According to UBS’ analysis, closing Bed Bath & Beyond stores have 1.78 of those competing stores within an average five-minute drive. Additionally, the retailer is closing 11 percent of stores that have two or more Walmart or Target locations in the area. And stores that remain open face -16 percent less competition than those closing.

And that competition could cost Bed Bath & Beyond during the second half of fiscal 2022, according to Goldman Sachs analysts. In their new report on the home goods retailer, analysts pointed to competition from discount mass merchants such as Big Lots and Ollie’s as a potential headwind.

“Although we think Bed Bath & Beyond sounded more constructive with regards to the opportunity in bringing back more national brands gradually, we continue to believe Bed Bath & Beyond will have a hard time driving customers to its store, especially in the second half, given the amount of competition we expect in the home goods industry,” analysts said. “We expect higher inventories of home goods at discounters, as well as a likely more promotional environment in retail overall could further weigh on margins.”