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Unpacking Bed Bath & Beyond’s ‘Self-Inflicted’ Crisis

Bed Bath & Beyond hopes a 20-year vet can fill the void left behind when former chief financial officer Gustavo Arnal plunged to his death last week.

After she took over for former chief accounting officer John Barresi just two months ago, Laura Crossen now faces the tall order of steering the Union, N.J. company’s financial dealings as the chain’s interim CFO.

“Her knowledge of the company and long tenure should also provide some stability during this challenging time and until a permanent CFO is named,” Telsey Advisory Group retail analyst Cristina Fernández wrote in a research note on Monday of Crossen, who joined Bed Bath & Beyond in 2001 and directly reported to Arnal. Crossen’s first order of business will be overseeing the company’s financial update when it reports second-quarter earnings on Sept. 29. She’s also tasked with cutting $250 million in costs, and making sure Bed Bath & Beyond is liquid enough to manage daily operations and purchase critical holiday inventory, Fernández added.

Though Bed Bath & Beyond found a Band-Aid for finance, it’s still seeking a permanent CEO to take the reins from interim CEO Sue Gove, the strategy committee board member filling in after Mark Tritton got the ax following a disastrous first-quarter report.

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But who’s even willing to work at Bed Bath & Beyond right now? Filling two C-suite roles at once poses a very tall order, one expert said.

“Bed Bath & Beyond will find it hard to find someone for the CFO spot when they don’t have a permanent CEO at the same time. And they’ll have a hard time finding someone for the CEO role because of all its troubles,” Walter Loeb, a former Federated executive and one-time Morgan Stanley retail analyst, said.

Because “bankruptcy” keeps coming up in conversations around Bed Bath & Beyond, Loeb believes virtually no one will want to take job that could last just a few months. The retailer might have to cough up a hefty signing bonus to convince anyone to take the risk, he said.

Stacking the C-suite is just one of Bed Bath & Beyond’s problems, however. “They have a conundrum,” Loeb said. “Aside from N.Y.C. where there aren’t many big-box retailers, consumers in other regions of the U.S. have other options that can easily replicate the merchandise offered there,” he said, stating his belief that many people wouldn’t care if their local Bed Bath & Beyond store shuts down.

Though the retailer last week announced big plans to cut jobs, stores and struggling private brands, equity and credit analysts questioned why the company waited this long to take such drastic action.

“We would note that while this is a step in the right direction, it is not dissimilar to what [it] was offering before the new management team came on board in 2019 and when the company was still comping negative compares consistently since [Fiscal Year 16], indicating there may be more to the underperformance aside from merchandising,” Goldman Sachs retail analyst Kate McShane wrote in a research note published Thursday. She’s also concerned about the chain’s negative same-store sales trends after Fiscal 2021 declines, “differentiating the company from many industry peers which saw pandemic-related strength last year.”

McShane recommends investors sell shares in Bed Bath & Beyond, which she thinks will be worth just $2 in 12 months, down from $7.04 at the close of trading Tuesday. She cited weak second-quarter comparable sales trends and “ongoing inventory issues and negative consumer sentiment” as the reason for her rating.

Financial sources tapped on Tuesday weren’t upbeat on Bed Bath & Beyond’s prospects. Most credit firms stopped approving orders to the company earlier this year. A few have left the door open, even though they haven’t signed off on any recent orders. And while Gove tried to reassure investors that all is well with the company’s vendor community, that doesn’t mean suppliers will be in a hurry to take the risk of renewing their shipments to the struggling retailer.

“There is no question that vendors are not going to want to ship to Bed Bath & Beyond,” according to one factoring executive.

This individual said his firm pulled the plug on order approvals earlier this year when Bed Bath & Beyond’s cash crunch was too serious to ignore. It also questioned how management was spending its money in a quarter when Bed Bath & Beyond burned through roughly $300 million. Adding insult to injury, some were concerned that the chain should have rerouted the $589 million it spent on share buybacks to initiatives that could help get the company back on track. The source said he isn’t planning to authorize new orders anytime soon, even though Bed Bath & Beyond secured $500 million in new financing, including an asset-backed revolving credit facility expanded by $130 million to $1.13 billion and a new $375 million “first-in-last-out” facility.

“The financing was pledged using its BuyBuy Baby asset. All it does is give them a bit more time to live to fight another day,” the factor said. Bed Bath & Beyond has a “history of holding up payments” to vendors, and he doesn’t think the chain can fix its merchandising mess in time for the holidays, making a bankruptcy filing a strong possibility, in his opinion.

A check in credit circles indicates companies still aren’t issuing credit insurance for shipments to the retailer, a trend that started last month. All signs point to a no-confidence vote in the 953-store chain.

Even the few lenders still receptive to taking a look at the company’s new financing probably won’t approve orders except on a case-by-case basis and on “very limited terms,” one credit analyst said.

Bed Bath & Beyond “missed the boat during the pandemic when the home sector was doing fantastically,” this person said, adding that the company should have been more aggressive with store closings. “Most of what they are going through is self-inflicted. Another problem is their supply chain. On the merchandising front, the store is under-inventoried. Tritton probably reached for the low-hanging fruit first, but that meant the big problems weren’t addressed,” he said.

Does pump-and-dump lawsuit hinge on Form 144?

As if the operational meltdown isn’t enough, the company is also defending itself against a securities fraud lawsuit alleging conspirators engaged in a “pump-and-dump” stock scheme. Pengcheng Si filed the purported class action lawsuit on Aug. 23 in a District of Columbia federal court, naming Bed Bath & Beyond, JP Morgan Securities, Ryan Cohen and his investment arm RC Ventures and Arnal as defendants. The complaint alleges that from March 25 to Aug. 18, Arnal and Cohen conspired to inflate the retailer’s stock price before insiders sold at a $110 million profit. The Wall Street Journal reported that Arnal’s stock sales were part of an automated arrangement that occurs once the target price is reached.

Alon Kapen, a corporate attorney at Farrell Fritz who isn’t involved with the lawsuit, said his review of the complaint shows there’s still much more that needs to be determined to understand if there’s any truth to the allegations, and what role, if any, Arnal might have played.

“The timing of the filings by Cohen are the most fascinating and juiciest [points] in the complaint,” the lawyer said, zeroing in on a paper Form 144 filing stating that Cohen planned to sell his large stake and options in Bed Bath & Beyond. What’s interesting, Kapen pointed out, is that while the Securities and Exchange Commission plans to make businesses file Form 144 digitally, the new rule “doesn’t kick in for a few weeks,” meaning Cohen could get away with turning in the paper form that essentially delayed the process of telling the public of his intent to sell. An electronic filing, on the other hand, would have been posted online almost immediately.

Though the attorney acknowledged the possibility that Cohen concocted the pump-and-dump scheme, there’s no firm public evidence yet that Arnal was aware of what Cohen might have been planning.

Neither Cohen nor RC Ventures returned a request for comment by press time.

“Maybe it’s not true that he had these conversations with Cohen about an effort to pump up the price of the stock. Maybe the conversations were just…calling to come in and invest in the company. It’s a good thing for the price of the company’s stock to rise. If [Bed Bath & Beyond] wanted to do an offering, it’s better to have a higher market cap [and] higher valuation because it reduces their cost of capital,” Kapen said.

Paul H. Aloe, who chairs the litigation practice at Kudman Trachten Aloe Posner LLP, said that many securities cases end up in a settlement, though in the so-called “pump-and-dump” lawsuits, the “individuals conducting the [scheme] would face not only civil liability [but also] criminal prosecution.”

The weeks ahead will likely surface “other issues,” Aloe added, saying he wouldn’t be surprised it “other lawsuits will be filed.”