At the end of last month, Bed bath and beyond (BBBY -8.76%) revealed a new plan to get out of an accelerating downward spiral.
Under interim CEO Sue Gove, the company plans to slash costs as much as possible, shift its merchandise assortment to national brands to win back customers, close another 150 underperforming stores and postpone virtually all long-term strategic investments. Meanwhile, Bed Bath & Beyond has locked up $505 million in new debt financing to shore up its liquidity.
By lining up new funding and cutting expenses to reduce cash burn, management hopes to buy time to turn the situation around. Unfortunately, even these heroic efforts are unlikely to save the iconic furniture retailer.
Business remains terrible
Three months ago, Bed Bath & Beyond reported comparable sales fell 23% year-over-year in the first quarter. This resulted in a net loss of $358 million and a quarterly cash burn of nearly $500 million. Management expected sales trends to remain similar in the second quarter before improving in the second half of fiscal 2022.
Along with its strategy update in late August, Bed Bath & Beyond said the decline in mockup sales accelerated to around 26% in the last quarter. Cash burn improved somewhat to around $325 million, but it’s still extremely high by objective standards.
Management still expects sales trends to improve soon, but not by much. The company is now calling for a decline in comp sales in the “20% range” for the second half of the fiscal year. This will almost certainly prevent Bed Bath & Beyond from becoming profitable again, despite its aggressive cost-cutting plans.
No quick fix available
Focusing on cost reductions is the right move for Bed Bath & Beyond, as it offers the only plausible path to survival. That said, it will likely prove too little, too late.
For example, Bed Bath & Beyond has just concluded a two-year program to close 20% of its namesake stores. These closures had no noticeable positive effect on the company’s finances. The decision to close nearly 20% of the remaining Bed Bath & Beyond stores just after completing the previous downsizing shows how store closures are more a symptom of a failing brand than a solution.
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Additionally, reducing costs and capital expenditures will not entirely solve Bed Bath & Beyond’s cash burn. After all, the company burned $325 million last quarter. Reducing quarterly expenses by $200 million would give some breathing room, but it wouldn’t make the business sustainable.
Interest charges will skyrocket
The bulk of Bed Bath & Beyond’s new financing consists of a $375 million term loan with a variable interest rate that will start at around 10%. With the Federal Reserve likely to continue raising interest rates in the coming months, this interest rate could approach 12% by mid-2023.
Meanwhile, Bed Bath & Beyond drew $550 million on its revolving credit facility in the first half of fiscal 2022. These borrowings carry a much lower interest rate (around 4% today) , but it will also increase as the Fed raises rates.
In total, Bed Bath & Beyond’s recent borrowings could add about $75 million to its annual interest charges next year. This will complicate the company’s efforts to return to break even or better.
Just a game of desperation
There is only one plausible way back to profitability for Bed Bath & Beyond: a rebound in sales. But that will be next to impossible to achieve if furniture spending continues to decline.
Unfortunately, inflation remains very high, which will force many consumers to reduce their discretionary purchases. And the Fed’s moves to fight inflation by raising interest rates could tip the economy into a recession next year. Given how much people have invested in sprucing up their homes in 2020 and 2021, buying more home-related items is unlikely to be a priority in the next two years.
US consumer price index (variation from year to year), given by Y-Charts.
Even after its capital raise, Bed Bath & Beyond only has $1 billion in cash, down from $1.4 billion at the start of fiscal 2022. The company also plans to sell 12 million shares, but at current prices, it would only fetch about $100 million. .
This liquidity cushion gives Bed Bath & Beyond about a year to get sales and profits back on track. Unless there is a dramatic turnaround in the macroeconomic environment, that won’t be enough time. By the end of 2023, liquidity will likely be down to critical levels, with a $300 million debt maturity looming in mid-2024, making bankruptcy all but inevitable.
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