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Why New Financing Might Not Fix Bed Bath & Beyond’s Biggest Problem

Bed Bath & Beyond (BBBY) is facing a double whammy—it needs both a financial and an operational restructuring, and time is the one thing it needs but may not have.

Bed Bath & Beyond shares surged on Thursday on a report that the company has lined up new financing.

Since Bed Bath & Beyond dismissed former CEO Mark Tritton after a dismal first quarter, the retailer has called in experts to right a sinking ship. It retained attorneys at the restructuring expert Kirkland & Ellis, the go-to law firm when retailers believe they might have to file for bankruptcy. Both J.C.Penney and Neiman Marcus turned to the New York City legal giant when they filed for bankruptcy in 2020.

Berkeley Research Group (BRG) is also helping Bed Bath & Beyond review its financial structure, Gustavo Arnal, the chain’s finance chief, said in June. BRG has a history of working with troubled retailers including Modells, which ultimately ended up filing for bankruptcy.

Bed Bath & Beyond has been “working expeditiously over the past several weeks with external financial advisors and lenders on strengthening our balance sheet, and the company will provide more information in an update at the end of this month,” it said in a regulatory filing last week.

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Bed Bath & Beyond’s new financing was first reported by the WSJ on Tuesday. However, details of the deal remains scant. On Wednesday, Reuters said talks were for a loan in the $370 million range with investment firm Sixth Street Partners, which has provided loans to DSW parent Designer Brands, Maurices and JCPenney.

Financing will help the chain manage debt payments and keep vendors happy, which will keep product flowing into its stores. Bloomberg reported last week that some suppliers refused to ship new products because Bed Bath & Beyond wasn’t paying its bills.

In recent years, private equity firms have gotten more involved in the credit business, providing loans to distressed retailers. Those loans can be somewhat risky, but also lucrative in other ways for the lenders. Some are structured as asset-based loans, meaning they are backed by assets such as inventory and real estate, and usually require a higher interest rate than a traditional bank loan.

What makes the possibility of an eventual bankruptcy filing a stronger likelihood is the fact that Bed Bath & Beyond burned through $300 million of its cash reserves in the first quarter. While some of that money was invested into the business, the retailers repurchased $43 million of stock in the first quarter. That’s relatively paltry versus the $589 million spent in 2021 to buy back shares, and an indication that Bed Bath & Beyond was already feeling financial distress. Repurchases can help boost the stock price, and give something back to shareholders, but it takes away cash that a struggling business needs to help regain its financial footing. And BBBY’s level of cash burn requires it to pull back dramatically on its spending. It’s a necessary move, but comes at a bad time when it needs to spend in order to buy inventory for the upcoming holiday season.

Interim CEO Sue Gove said in the first quarter conference call that Bed Bath & Beyond was “going to be focusing on balancing our assortment, lowering our inventories, managing our costs, strengthening our balance sheet. Our vendor relationships, our vendor partnerships are going to be critical.” More importantly, she acknowledged that UBS analyst Michael Lasser was correct in saying it can be hard to reengage customers and regain vendors’ confidence.

Arnal said the “net cash used in operations was approximately $380 million,” adding that the retailer also borrowed $200 million from its $1 billion asset-based revolving credit facility to fund working capital needs. He said the company ended the quarter with a cash and investment balance of $200 million, with total liquidity of $900 million. That’s compared to a year ago when BBBY had over $1 billion in cash reserves. The retailer’s balance sheet has about $1.3 billion of net debt, including nearly $300 million of debt due August 2024.

Bed Bath & Beyond could also sell Buybuy Baby but there’s no guarantee it would fetch the $900 million analysts think it’s worth. And even if it does, it may not be enough to provide the financial assist the company needs to ease an overleveraged balance sheet. And if it can’t figure out how to quickly draw customers back during the all-important holiday selling season, the chain might be left without a raison d’être.