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How Will Bed Bath & Beyond Right the Ship?

On the eve of strategic update call expected to reveal big changes, beleaguered home goods retailer Bed Bath & Beyond has hit a critical point in its attempt to turn around a years-long decline. After several disastrous quarters with double-digit losses that prompted the company to ax CEO Mark Tritton, along with its chief merchandising officer, the company’s latest blow came earlier this month when S&P Global Ratings downrated the company from “B-“ to “CCC,” giving the retailer a negative outlook that could point to liquidity problems and a potential bankruptcy.

In anticipation of the strategic update, Morgan Stanley released a report outlining some of their predictions and insights for the call and how Bed Bath & Beyond will operate over the next quarter.

Chief among those is financing, a crucial first step in figuring out a way forward for the company. Morgan Stanley pointed to recent reports that Bed Bath & Beyond is finalizing terms to secure financing in the range of $375-$400 million. Estimating that the company will burn through about $1 billion this year, and need around $800 million in liquidity for inventory leading into the holiday season, Morgan Stanley said Bed Bath & Beyond will likely face high interest rates or payment-in-kind for financing. Wedbush researchers in a note published Monday agreed that “the additional capital should significantly decrease short-term liquidity risk and buy the company more time to address its bloated inventories, cost structure and market share losses.”

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Once financing is secured, optimizing cash burn between paying for inventory, reducing expenses and investing in the business becomes crucial for successfully navigating into the fourth quarter, according to Morgan Stanley.

“In our view, this is no easy task given current revenue declines and EBITDA deterioration,” Morgan Stanley researchers said in the report. “The combination of an approximate $400-million loan and existing revolver capacity could be sufficient to get Bed Bath & Beyond to Q4, when working capital becomes a source of cash as holiday inventory is sold.”

Wedbush added that if “cash burn remains elevated into next year, the company might need to tap into the $600m remaining on its [asset-based loan].”

Looking at comps for 2022, Morgan Stanley researchers said consensus is modeling comps of -21 percent, -10 percent, and 6 percent in Q2-4. That follows -23 percent comps in Q1 for full-year comps of -15 percent. EBITDA is modeled at a loss of around $300 million. Morgan Stanley’s model is set up at -14 percent for full-year comps and an EBITDA loss of approximately $212 million.

“Compares ease particularly in Q4, though it’s unclear the degree to which comps will improve,” Morgan Stanley researchers said. “If comps were to decline in the high teens (still implying some sequential acceleration) at a decremental margin of 15 percent, EBITDA could fall to a loss of around $250 million for the year, or approximately $40 million below our current forecast.”

Speculation around the selling of Bed Bath & Beyond’s BuyBuy Baby brand continues, with the company acknowledging interest in the brand as recently as June. But Morgan Stanley researchers pointed to reports of a potential $375-$400 million loan possibly being secured by the BuyBuy Baby brand, precluding a sale. However, if a sale were to happen, the researchers believe it could generate around $500 million in after-tax proceeds, assuming a low-double-digit EBITDA multiple in the sale.

While Morgan Stanley researchers anticipate total consumer discretionary spending to grow around 1.5 percent in the latter half of 2022, they expect spending on durable goods will decline by around 19 percent year over year in the back half. That possibility, along with Bed Bath & Beyond’s spotty record in the fourth quarter in recent years has Morgan Stanley questioning how the company will right the ship before year’s end. Tomorrow’s call may offer insights, but until then, Bed Bath & Beyond has plenty of work ahead.

“This is not a simple discussion with a clear path forward, and the market may naturally be skeptical given prior attempts at reviving the brand,” the researchers said. “Offering 20 percent off coupons for entire purchases (a recent tactic) is not a viable solution for profitable growth or brand building.”