Bed Bath & Beyond's Cash Burn Leaves Little Hope for Firm to Continue Operating As Is 

Senior Equity Analyst

Jaime M. Katz

Bed Bath & Beyond has been plagued by sluggish foot traffic that has hindered sales and driven inventory clearing on and off for some time. To counter these challenges, management put forth a strategy in August 2022 to revitalize its brand and regain customer confidence by reverting its focus to national brands. However, this plan struck us as incredibly similar to efforts that failed to jolt the business a few years back, leading us to doubt whether such steps would meaningfully improve the firm's trajectory. The firm's third-quarter, which included a 33% sales decline, would attest that the new plan has failed to stimulate demand.

Although the firm recently discontinued three private brands (Haven, Wild Sage, and Studio 3B), and pared inventories for the remaining six by 20%, we don't believe increased shelf space for national brands can save the business. Profits should stay under pressure, with discounts expected to persist, particularly given the weak housing market conditions and realignment of Bed Bath's product offerings. Even with the continued rightsizing of its fleet and shuttering roughly 150 underperforming Bed Bath stores in the near term (with a plan to shut down 50-60 stores in fiscal 2022 ending February), cash burn from losses are untenable, and Bed Bath could run out of liquidity in the first half of calendar 2023. Our revised expectations include a sales base that shrinks by around 30% in the current fiscal year, compounded by the affect from inflation and stock outs on near-term demand.

If Bed Bath remains a going concern, it could possibly return to a low-single-digit operating margin by 2026. This would require a few factors. First, creditors would have to be willing to work with the retailer to keep it afloat (unlikely, given the failed debt exchange). Next, gross margin would have to stabilize through better inventory management processes (also unlikely, in our opinion). Last, housing demand would have to stabilize to support sales. Even if all these factors cooperated, any gains would likely be offset by continued investments, as the home furnishing landscape remains fragmented and competitive, limiting profitability.

Business Strategy & Outlook

We do not believe Bed Bath & Beyond has established an economic moat, given the brand's limited pricing power, nonexistent consumer switching costs, and lack of cost advantages. As the company competes in largely commoditized retail categories with ample domestic brick-and-mortar and online rivals, we believe the lack of moat remains evident in the historical frequency and size of couponing, which underscores a consistently promotional environment and the price-sensitivity of the consumer base, which has easy access to pricing comparisons through the use of smartphones and other handheld devices. The company’s business update in August established a new roadmap to simplify the business through fleet optimization and product realignment. While we appreciate the firm’s willingness to evolve, we believe the plan will ultimately be a failure given its failed efforts to revitalize its national brands in the past, leading the company to file for bankruptcy. 

From a market share perspective, the company still holds a modest position in the roughly $118 billion domestic home furnishing retail category (using 2021 U.S. Census retail sales statistics), with a mid-single-digit share at the end of calendar 2022. Our model, which calls for a bankruptcy (via restructuring or liquidation), forecasts average returns on invested capital including goodwill of negative 2% between 2022 and 2031, substantially below our 8% cost of capital assumption, and we expect this metric will stay constrained by a secular decline across much of the brick-and-mortar retail landscape due to elevated price competition with online players like wide-moat Amazon, warehouse clubs, mass merchants, and other specialty retailers.

We anticipate that consumers will continue to gravitate toward price leaders in the retail category, resulting in industry consolidation and share gains for players that can pass along cost advantages to consumers in the form of low prices. While we believe Bed Bath & Beyond has historically compared well with online players and other mass merchants from a pricing perspective, we have concerns that weaker home furnishing, department-store, and specialty retail rivals could be forced into competitive pricing strategies to stimulate traffic in an effort to thrive after the pandemic, which could temporarily change the economics across the entire home furnishing retail category, diluting profitability. We think Bed Bath & Beyond (and its secondary concepts) will require a complete restructuring in order to remain an existing shopping destination post COVID-19, given its inability to generate any support level for interest in its products. While Bed Bath has attempted to rely less on its ubiquitous coupons and instead focus on providing customers with everyday value (expanding to a good, better, best model) that could resonate with its customers, we don't think such changes are relevant enough to save the business.

None

Economic Moat

Bed Bath & Beyond Inc

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Bed Bath & Beyond is an omnichannel retailer selling a wide assortment of domestics merchandise and home furnishings. The Company generally has the ability to have customer purchases picked up in-store or shipped directly to the customer from the company's distribution facilities, stores, or vendors. In addition, the company operates an e-commerce website that features specially commissioned, limited edition items from emerging fashion and home designers; One Kings Lane, an authority in home décor and design, offering a unique collection of select home goods, designer and vintage items; PersonalizationMall.com, an industry-leading online retailer of personalized products; Chef Central, an online retailer of kitchenware, cookware, and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. The Company also operates Linen Holdings, a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, healthcare and other industries  Bed Bath & Beyond was established in 1971 in Union, New Jersey by Warren Eisenberg and Leonard Feinstein.

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