After paying interest on its senior unsecured notes, Bed Bath & Beyond got a bit of an upgrade from S&P Global Ratings. The agency announced on Monday that it upped the troubled home goods retailer’s issuer credit rating to a CCC from a D. S&P also raised its issue-level ratings on Bed Bath & Beyond’s senior unsecured debt from D to C.
That said, S&P still reported a negative outlook for Bed Bath & Beyond.
“Despite its incremental liquidity position, we believe Bed Bath & Beyond’s turn-around prospects remain very weak,” S&P said in a release. “In our view, Bed Bath & Beyond’s customer value proposition has eroded significantly due to poor merchandising decisions, deficient omni-channel capabilities, and a lack of available inventory in key product categories. We believe comparable store sales fell sharply during the fourth quarter and that these trends have continued into the current fiscal year.”
Bed Bath & Beyond made overdue interest payments on its senior unsecured debt in late February after an influx of cash from a Series A stock fund offering. Hedge fund Hudson Bay Capital Management purchased the $225 million worth of shares, along with $800 million through the issuance of securities requiring the holder to purchase shares of Series A preferred stock in future installments.
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And while that cashflow has breathed new life into the nearly dead retailer, S&P analysts don’t think it’s enough to keep Bed Bath & Beyond afloat longterm. The ratings agency pointed to the company’s significant debt, including outstanding borrowings drawn on its $565 million asset-based loan (ABL) facility and $529 million in first-in, last-out principal, as being insurmountable without a significant turnaround of its store traffic and sales.
“We project cash generation remaining strained in 2023 based on our anticipation for weak operating results, working capital needs and elevated interest expense,” S&P said. “Further, we expect liquidity will be constrained given the company’s reliance on its ABL to fund its turnaround plans. Bed Bath & Beyond’s senior notes trade at steep discounts to par and we believe there is a high likelihood that the company will pursue a distressed debt exchange, as it has in the past, to reduce principal and interest expense.”
While Bed Bath & Beyond is in the process of streamlining its store fleet from 762 in November 2022 to around 360, along with liquidating its Canadian operation, reduced consumer traffic and sales numbers are likely to continue to plague the retailer. S&P pointed to softening consumer demand for home goods as well as multiple managerial changes as additional factors impacting Bed Bath & Beyond’s longterm outlook.
“We expect consumer spending on home goods will remain subdued due to inflationary pressures constraining discretionary income as well as redirected spending on other categories and experiences,” S&P said. “Further, while there has been significant management turnover, the company has a poor track record of implementing successful strategic initiatives. We believe reversing years of market share losses amid a highly competitive environment featuring better-capitalized and equipped competitors will be very difficult.”
S&P said it would lower Bed Bath & Beyond’s rating if it announces or engages in an exchange offer or debt restructuring, or if it is unable to meet its debt payments. Conversely, the retailer could get a rating bump if it effectively implements its turnaround plan and improves operating results and cash generation, along with ensuring there is no longer a high probability of a near-term distressed exchange.