BBBY - Bed Bath & Beyond: Business Decline Bleak Prospects And Likely Bankruptcy

2023-04-12 02:39:53 ET

Summary

• Deteriorating financial health and sales performance due to various factors, including shifting consumer preferences and intense competition.
• April 26 deadline to raise $300 million from equity markets to avoid bankruptcy, tied to BBBY's obligation to submit a 10-K to the SEC.
• Increasing likelihood of bankruptcy, as lenders are unwilling to take on the additional financial risk associated with BBBY's unstable cash flow.
• Long-term prospects remain bleak, with BBBY struggling to adapt to changing consumer demands and competition from e-commerce giants.
• Leadership instability and poor execution track record raise doubts about BBBY's ability to successfully implement future strategies.

Bed Bath & Beyond ( BBBY )'s financial health and sales performance have been deteriorating, with increased competition, shifting consumer preferences, and leadership instability exacerbating BBBY's struggles. I don’t think BBBY will be able to raise $300 million from equity markets by April 26 to avoid bankruptcy. In this article, we will discuss the retailer's poor financial results, the looming threat of bankruptcy, and the long-term issues that plague BBBY. Despite its efforts to restructure and adapt, the company has been unable to recover, and its prospects look increasingly bleak, making shorting BBBY stock a compelling proposition.

Deteriorating Financials and Sales Performance

BBBY's financial health has been deteriorating over the past few years, with increasing losses and dwindling liquidity. The third quarter results continued to deteriorate. BBBY reported a net sales decline of 33%, driven by a comparable sales decrease of 32%. Both the BBBY banner and buybuy BABY experienced significant declines in comparable sales, mainly due to lower in-stock positions and decreased customer traffic. Despite an increase in Welcome Rewards memberships, BBBY's adjusted gross margin stood at a meager 22.8%, reflecting increased clearance activity and promotional activities. BBBY's aggressive cost reduction initiatives led to a decrease in SG&A expenses; however, a net loss for the quarter included $100.7 million of non-cash impairment charges. With cash flow from operations at approximately $(307.6) million and liquidity of approximately $500 million, BBBY is on track to close 150 stores by the end of fiscal 2022 while initiating further cost reduction measures across corporate and supply chain segments. For instance, on March 24, 2023, BBBY announced plans to lay off over 1,000 employees across various locations in New Jersey.

The subpar financial outcomes stem from various elements, including the failure to attract attention to their products, evolving customer tastes, and the organization's difficulty in adjusting to the swiftly transforming retail environment. The attempts to reorganize and rejuvenate the business have not been adequate, resulting in ongoing decreases in revenue and operational deficits.

Bankruptcy Looming on the Horizon

BBBY's financial situation is so precarious that bankruptcy appears increasingly likely. BBBY's inability to complete its debt exchange offering indicates that lenders are unwilling to swap their positions on the balance sheet due to BBBY's unstable cash flow generation. This unwillingness suggests that creditors are unlikely to take on the additional financial risk associated with BBBY, further increasing the likelihood of a bankruptcy outcome in 2023.

On March 30, 2023, BBBY launched an "at-the-market" offering program to sell up to $300 million of shares. BBBY is facing a race against time to raise $300 million from equity markets by April 26 to avoid bankruptcy. The April 26 share sale deadline is linked to BBBY's obligation to submit the 10-K to the SEC. Within this report, BBBY must assess if it still meets the criteria for being considered a "well-known and seasoned issuer," (WKSI) which allows for easier access to US public markets. When filing the 10-K, a company must evaluate whether it meets the criteria to be classified as a WKSI based on SEC Rule 405, which has three conditions that must be satisfied. These include meeting the requirements of Form S-3, having a public float of over $700 million and having issued more than $1 billion in non-convertible debt securities in primary offerings, and not being an "ineligible issuer."

The retailer's struggles have been years in the making, and even after raising $360 million in emergency financing, it still needs more funds. Equity markets are not welcoming, with retail investors turning away from the stock. BBBY is increasingly dependent on banks and other partners to manage its business, and its relationships with suppliers have suffered due to payment issues.

Should BBBY succeed in evading insolvency in the near term, its long-range outlook still appears gloomy, given the myriad obstacles it confronts. Fierce rivalry from internet behemoths such as Amazon ( AMZN ) and other large-scale retailers significantly strains BBBY. By utilizing their size and cost benefits, these competitors can provide more attractive prices to shoppers, which makes it progressively harder for BBBY to maintain a competitive edge, particularly in standardized product segments.

Furthermore, changing consumer preferences have significantly impacted BBBY's market position. Today's consumers are increasingly seeking environmentally friendly products, responsible product sourcing, and secure data practices. BBBY has struggled to adapt to these new demands, which has contributed to its declining performance and mounting challenges.

The operational challenges faced by BBBY, including vendor caution, supply chain issues, and inflation, have significantly impacted its efforts to restructure and revive its business. BBBY's attempts to rely less on coupons and focus on providing customers with everyday value through a good, better, best model have not been enough to save the business.

Moreover, BBBY's leadership changes have failed to bring about any substantial improvements. Mark Tritton, who became CEO in late 2019, was unable to execute the turnaround plan he developed. His departure in late 2022 and the appointment of Sue Gove as the new CEO have not led to significant progress. This leadership instability, combined with BBBY's poor execution track record, raises doubts about its ability to successfully implement any future strategies. Talking about leadership, on April 3, 2023, former CEO Mark Tritton sued BBBY for allegedly failing to honor his $6.8 million severance agreement.

Risk of shorting the shares

Shorting a stock is a high-risk strategy that carries several potential risks, including unlimited losses, margin calls, limited profits, timing risk, and market volatility. Before engaging in short selling, it's essential to carefully consider and understand the potential risks and rewards. In the case of BBBY, a reverse split or beneficial terms from an angel investor or bondholders could be detrimental to a short position.

Conclusion

The financial state and operational hurdles of BBBY portray a dismal outlook for BBBY's prospects. Its lack of adaptability to the shifting retail environment, rivalry with online titans, and ineffectiveness in implementing successful recovery plans provide scant optimism for a turnaround. With the shadow of bankruptcy hovering and no evident route to surmount the countless impediments, BBBY's future appears unpromising, reinforcing the argument for shorting the stock. The only way I would change my bearish outlook is if the company gets financing at very attractive terms and BBBY's results improve in the following eight quarters.

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