After 28% Drop In Revenue, Bed Bath & Beyond Stock Needs A Markdown


With its shares down about 93% from their 2014 high, can Bed Bath & Beyond
BBBY
execute a turnaround plan before it burns through its cash?

That’s the question that comes to my mind after the retailer reported a 28% drop in revenue and a loss that topped expectations in its August-ending quarter.

The primary reason for the sorry condition of this retailer is a failed bet that a private label strategy that helped turn around Target
TGT
would boost BBBY’s growth.

The Wall Street Journal reports that as of mid-September, about 39.3% of its float is sold short — a considerable wager that BBBY’s shares have further to fall.

That looks like it could be a profitable bet.

(I have no financial interest in the securities mentioned in this post).

BBBY’s Bad Fiscal Q2 Report

BBBY sales dropped 28% and it reported a bigger than expected loss in the fiscal second quarter. According to CNBC, the lowlights of its report include

  • Disappointing loss per share of $3.22 — 74% worse than expected
  • Below target revenue of $1.44 billion — $30 million short of forecast
  • Dropping sales at Buybuy Baby — decreasing “in the high teens” after high teens growth in 2021’s fiscal second quarter

Following cost-cutting measures — layoffs and closing about 150 stores — announced in August, BBBY still anticipates full year “comparable sales to decline by about 20% as its business improves in the back half of the fiscal year,” according to CNBC.

Interim CEO Sue Gove is optimistic. In a news release she said that BBBY is fixing inventory problems by marking down merchandise. Gove said that BBBY’s costs will fall by $500 million, according to the Journal.

She expressed confidence that BBBY’s “current liquidity — [in August, BBBY secured more than $500 million of new financing] — will enable the necessary changes we are implementing.”

How BBBY Got Into So Much Trouble

At the risk of oversimplifying, as I wrote September 5, BBBY tried to reverse a loss of customers to rivals like Target, Costco, Walmart
WMT
Amazon
AMZN
and Home Goods by hiring an executive in 2019, Mark Tritton, from Target to implement a private-label strategy (knock offs of popular brands at a lower price).

Sadly Tritton pushed all the stores to get the items customers wanted off their shelves to make room for the private label goods they shunned. Earlier this year, Tritton’s strategy sent sales down and in June he was shown the door.

One good thing that BBBY’s founders did was to shun centralized buying and allow store managers to purchase 70% of the products sold in their stores. For example, store managers on the coasts knew that consumers there liked duvet covers while midwestern store managers provided comforters which their consumers preferred, noted the Wall Street Journal.

To the detriment of BBBY investors, customers, and store managers; Tritton decided to centralize buying so BBBY could get the best prices for private label products from factories.

Local store managers lost their power to tailor their assortment to the needs of their communities. Instead, corporate merchandisers told local stores “what to buy and where to place the items in stores,” noted the Journal.

This centralization landed merchandise in stores that local consumers did not want to buy. PJ Gumz, an Irvine, Calif. store manager who left when BBBY closed her store, said, “We’d get large quantities of stuff that we couldn’t sell. [We] once got a shipment of 95 purple rugs under the Wild Sage private brand that she had to discount by 80%,” reported the Journal.

BBBY clearly did not ask consumers whether they would buy its private label merchandise.

Before the pandemic, BBBY tried to clear the stores of branded merchandise to make room for the private label items. BBBY stopped ordering popular brands like All-Clad cookware, OXO kitchen gadgets and Mikasa china and heavily discounted the remaining inventory to clear it out of the stores.

When the pandemic hit, factories closed, BBBY’s shelves were empty and when they finally filled up with the private-label goods, “they didn’t resonate with shoppers,” according to the Journal.

As Gumz explained, “My customers would look at the private label and say, ‘What is this?’ [when I] tried to persuade them to buy [our private label] dishes, they’d say, ‘Where’s Mikasa?’”

Ignoring what its loyal consumers want to buy has cost BBBY dearly. For example, Sarah Penrod, a professional chef, used to buy All-Clad cookware and Wüsthof knives from BBBY on a regular basis. She has jumped ship because the retailer no longer stocks what she wants to buy.

BBBY’s Diminishing Financial Resources

BBBY’s cash position was perilous at the end of August. It finished the fiscal second quarter with $135.3 million of cash — 86% below its balance the year before. To be fair, that fiscal second quarter cash position is better than where it was at the end of May — up a mere $27.8 million, noted the Journal.

Since closing its books on the fiscal second quarter, BBBY says its has “liquidity of about $850 million as of September, reflecting new loans it secured after the quarter ended,” according to the Journal.

But liquidity is not cash — it is borrowing that BBBY will have to pay back. Gove said that BBBY is using its borrowings to make overdue payments to suppliers — sending accounts payable down 21%, noted the Journal.

Can BBBY’s Turnaround Strategy Pay Off For Investors?

This is a tough time to be trying to turn around BBBY. After all, it has lost market share on the back of a flawed strategy, competitors are benefiting from its weaknesses, and demand for homegoods is lower and likely to keep falling.

Meanwhile, one analyst offered a sober assessment of BBBY’s prospects. Neil Saunders, managing director of research firm GlobalData, wrote in a note to clients “There is nothing in these numbers that suggests the company has turned a corner; indeed, they firmly point to a business that is living on borrowed time.”

As he pointed out, BBBY’s liabilities have weakened its balance sheet to the point that it has negative equity — specifically, its liabilities exceed assets by $500 million. “This isn’t a sustainable position and, if it is to survive, Bed Bath & Beyond will need to make changes at a pace that would be challenging for a healthy company, let alone an ailing one.” wrote Saunders.

BBBY faces formidable competition. Its famous blue discount coupons are no match for easy to compare online prices. And when BBBY closes its stores, Walmart and Target will pick up the slack. As Michael Lasser, a retail analyst at UBS, told CNN Business, “around 79% of Bed Bath & Beyond stores are within a 10 minute drive of a Walmart and 77% of stores have a Target within 10 minutes.”

If that is not a big enough challenge, BBBY is trying to regain market share at a time when home goods demand is significantly below where it was in 2021, Saunders noted. What’s more high inflation, a declining stock market, and rising interest rates all foretell continued weakening in demand for home goods.

With $500 million in negative equity, fierce competition, and declining home goods demand driven by high inflation and rising interest rates, now is a difficult time for BBBY to try to reverse its self-inflicted market share losses.

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