Home ANALYSIS: Bed Bath & Beyond Gets Boost from Stock Sale but Questions Linger
February 8, 2023

ANALYSIS: Bed Bath & Beyond Gets Boost from Stock Sale but Questions Linger

By: Mike Duff

Contributing Editor

Bed Bath & Beyond found a potential rescuer in Hudson Bay Capital, but it still has a long way to go before its fortunes are secure.

Certainly, Bed Bath & Beyond is characterizing the stock transaction and its backing by Hudson Bay Capital (not affiliated with Hudson’s Bay Co., the Canadian retail company) as a game changer. Closing the transaction brings the company an initial gain of $225 million with up to $800 million more potentially to come.

In announcing the closing, Bed Bath & Beyond president and CEO, Sue Gove said, “This transformative transaction will provide runway to execute our turnaround plan. We continue to put our customers at the center of every decision, positioning Bed Bath & Beyond to meet and exceed their expectations, while resetting our foundation for near- and long-term success. We are optimizing our store fleet and supply chain and continuing to invest in our omni-always capabilities. This will enable us to better serve our customers, and grow profitably, by directing merchandise where and how they want to shop with us. We are also prioritizing the availability of leading national and emerging direct-to-consumer brands our customers know and love. As we make important strategic and operational changes, we will continue to take disciplined steps to enhance our cost base and improve our financial position.”

The transformation will have multiple dimensions. On the store side, it will include shuttering more stores on top of those already announced to reach 360 Bed, Bath & Beyond and 120 buybuy Baby stores, essentially halving the chain. As noted earlier by HomePage News, that includes not only cutting back on the core banner but the elimination of the Harmon banner as well, at least in terms of store operations. Recent Bed, Bath & Beyond moves in the health and personal care categories associated with the Harmon brand, which it introduced into its namesake stores, will no longer play a factor in its plans going forward. Bed Bath & Beyond did not immediately respond to an inquiry about the Harmon brand status. 

Under the circumstances, Bed Bath & Beyond said will continue to pursue its turnaround plans, including optimizing its store footprint, investing in inventory and pursuing infrastructure improvements. The retail unit reduction will leave Bed Bath & Beyond operating its most profitable stores, generally, where the company has the best geographic locations. As it appears, Bed Bath & Beyond wants to establish an omnichannel positioning that will rely more heavily on Internet-based sales supported by the smaller store base. The company pointed out that it expects the digital channel to emerge as a higher proportion of sales with improved channel profitability.

Observers largely agree that Bed Bath & Beyond has a lot of work to do for its turnaround to succeed. For one thing, online competition in homewares and home furnishings is fierce and Bed Bath & Beyond, a digital laggard, faces retailers with greatly expanded e-commerce assortments including those emerging from third-party marketplace operators. Bed Bath & Beyond stated that it would go forward with mixed channel plans that it believes will facilitate better execution of inventory prioritization and distribution, particularly across its smaller physical store footprint. The approach includes pursuing asset-light inventory management initiatives such as those involving vendor-direct-to-consumer, marketplace and innovative collaborations.

Still, Bed Bath & Beyond has traditionally been the store consumers visit when they want more than the housewares basics available at mass market retailers. The traditional advantage already took a hit when, under former CEO Mark Tritton, the stores moved away from the familiar high-piled bay to lower-fixture merchandising that no longer suggested Bed Bath & Beyond offered a more abundant choice. In the era of the endless aisle, especially as developed by Amazon, Bed Bath & Beyond has little or no assortment advantage online. As such, the company will have to continue leaning on its couponing efforts via snail mail, email, website and wherever else it can command consumer attention.

Even if operational initiatives begin drawing consumers back to its remaining stores and the website, Bed Bath & Beyond still has to advance its interests beyond the initial $225 million infusion by Hudson Bay Capital to capture the additional $800 million. In recent days, the company stock has rallied, but observers are suspicious that share prices are still under the influence of a meme campaign that began some months ago and caused an initial shakeup in terms of the company’s financial position.

The underwritten public offering, including shares of the company’s Series A convertible preferred stock, warrants to purchase shares of Series A Convertible Preferred Stock, and warrants to purchase the company’s common stock, comes with Bed Bath & Beyond’s expectation of receiving the additional $800 million of gross proceeds in future installments, assumes certain conditions are met. However, the conditions are complex and the company indicated that it can’t provide assurance that it will receive any or all future installments. 

Even with the money, Morningstar Equity senior analyst Jaime Katz characterized Bed Bath & Beyond’s capital allocation choices as “poor.” In a research note, he pointed out that with proceeds from the stock transaction, plus $100 million under an amended facility targeted to first paying off the asset-based facility and getting the company out of default, Bed Bath won’t fundamentally improve its financial position as it existed before the transaction. Return on invested capital post-transaction could even slip further if, as Bed Bath & Beyond has maintained, it reborrows from the revolving loans repaid using offering proceeds for general corporate purposes, which would boost the invested capital base, driving returns even lower, Katz warned

As he weighs the pros and cons, Katz wrote that Bed Bath & Beyond’s less discretionary categories, including linens, towels and cookware, offer resiliency at a time when consumers confronted with an unsettling economy are cutting back some spending. Also, registries that pull customers into the stores and the closure of underperforming locations that pressure profitability could help, as would cleaner inventories featuring more of the national brands the company’s traditional customers embraced. However, he also contended that low customer switching costs and the utility offered by e-commerce stand against Bed Bath & Beyond, as do some home purchasing trends, the difficulties forced on it by the change of strategic store plans and ongoing inventory management issues.

Two other factors bear further consideration. Bed Bath & Beyond disappointed a lot of customers in the holiday season with bare shelves and an unfamiliar, new floor plan. And it will incur costs in closing stores to get to its new more profitable core. Add to that the need to restore vendor relationships, which, Katz observed, have eroded significantly given the company’s financial woes and potential to file for bankruptcy.

Bed Bath & Beyond continues to make its case, insisting that it has identified significant opportunities to improve its financial position by streamlining the supply chain, technology, expense structure and business processes as it realigns its business foundation. The changes envisioned will help the company strengthen business partnerships with suppliers, real estate and service partners, it asserted.

Gove said, “Our board and management, working closely with advisors, evaluated every strategic alternative available to us to reach the appropriate solution to maximize prospects for all stakeholders in our pursuit of long-term value creation. We are determined to achieve our goals, and we are grateful to our thousands of associates and many partners for their dedication to our beloved brands, Bed Bath & Beyond and buybuy BABY.”

On February 8, in an 8-K filing with the United States Securities and Exchange Commission, Bed Bath & Beyond amended the prospectus for its stock transaction, saying:

“We may not have enough authorized common stock to satisfy the exercise of the warrants to purchase common stock and the conversion of the preferred stock. This also impacts our ability to issue common stock in the future unless we are able to amend our certificate of incorporation. In connection with this offering, we have agreed not to issue additional equity securities other than upon exercise and conversion of the securities offered hereby for a period of 90 days.”

So, Bed Bath & Beyond is in a difficult and complicated position, and it’s going to require a lot of effort to put the operation on a firm footing. The company has added Carol Flaton to its board of directors. A board member of Talon Energy, she was a managing director at AlixPartners, specializing in restructuring and turnarounds. Bed Bath & Beyond also named Holly Etlin, a partner and managing director at AlixPartners as its interim chief financial officer, as related in an SEC filing. AlixPartners is a consultancy known for its turnaround work. Etlin is a Certified Turnaround Professional.

As such, Bed Bath & Beyond clearly plans to keep fighting for survival.

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