The Share Buyback That Killed Bed Bath & Beyond

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When Tritton took the top job in late 2019, the iconic home furnishings destination desperately needed a reinvention. The former Target chief merchant rapidly implemented long-overdue strategy changes. While one could quarrel with some of his decisions (e.g., abruptly changing Bed Bath & Beyond’s product sourcing strategy and initially prioritizing merchandising changes over supply chain modernization), most of his plans made sense.

Unfortunately, the supply chain snarls of 2021 and plunging demand for home furnishings in recent months have wreaked havoc on Bed Bath & Beyond’s business. Still, the company could have survived this setback if it had maintained a strong balance sheet. Alas, Bed Bath & Beyond squandered $1 billion on an ill-advised share buyback program under Tritton’s watch. As a result, it is now fighting for survival: a fight it will probably lose.

From Bad to Ugly to Even Worse

Just a year ago, Bed Bath & Beyond reported results “ahead of expectations” and claimed that its turnaround was going faster than expected. Indeed, there were some green shoots in its financial results for the first quarter of fiscal 2021. Comparable sales increased three percent compared to 2019 with an improving gross margin.

Bed Bath & Beyond isn’t quite dead yet, but its chances of surviving in its current form are slim. Home furnishings demand is retreating rapidly from the spending surge of the past two years. That will make it hard to stem the company’s cash burn even with aggressive belt-tightening and inventory reductions.

Yet even then, there were signs that management was overestimating the company’s progress. For one thing, despite beating its plans, Bed Bath & Beyond was barely profitable in that quarter.

Moreover, while sales trends had improved relative to 2019, this came in the context of surging demand for home furnishings. Whereas Bed Bath & Beyond reported Q1 2021 comparable sales modestly ahead of 2019 levels (but total sales down after accounting for store closures), key rivals like Target and HomeGoods grew their home department sales roughly 50 percent over the same period.

In subsequent quarters, Bed Bath & Beyond’s financial performance deteriorated rapidly, due to slowing sales, rising freight costs, and supply chain snafus. As a result, Bed Bath & Beyond eked out another small profit in the second quarter (missing its quarterly forecast) and plunged into the red in the second half of fiscal 2021.

By the fourth quarter of last year, Bed Bath & Beyond was posting double-digit sales declines and widening losses. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) fell to -$30 million in Q4 2021 from $168 million a year earlier.

That was before the big deceleration in home furnishings demand that has roiled the industry this spring. With inflation and shifting budget priorities now causing Americans to cut back on home-related purchases, comparable sales plummeted 23 percent last quarter, including a 27 percent drop for the core Bed Bath & Beyond brand. Adjusted EBITDA fell to -$224 million, reflecting the atrocious sales results and markdown reserves needed to address excess inventory. This was the final straw that sent both Tritton and chief merchant Joe Hartsig packing.

The Worst Buyback in History?

When Bed Bath & Beyond revealed its turnaround strategy in late 2020, it also announced plans to buy back $675 million of stock. That included an immediate $225 million accelerated share repurchase (ASR) program and additional buybacks of up to $450 million between fiscal 2021 and fiscal 2023.

Repurchasing shares so early in the turnaround process was a somewhat dubious move. That said, Bed Bath & Beyond appeared to have plenty of cash at the time. Even after funding the initial $225 million ASR, the company had about $1.5 billion of cash on hand as of November 2020, compared to just $1.2 billion of debt.

But whether due to overconfidence, a misguided effort to court shareholders, or other reasons, Bed Bath & Beyond became increasingly aggressive about its share buyback plans. It increased its total buyback target from $675 million to $825 million in December 2020 and again to $1 billion in April 2021. And in November 2021, when business trends were already looking shaky, the company announced that it would complete the full $1 billion share repurchase program by the end of fiscal 2021, rather than over a three-year period.

Between these buybacks and the company’s accelerating cash burn, Bed Bath & Beyond used its entire $1.5 billion cash stockpile in just 18 months. The company suffered a cash outflow of around $500 million last quarter alone, forcing it to tap its credit line for $200 million to keep paying the bills.

Plenty of companies have made questionable decisions to buy back stock over the years. However, Bed Bath & Beyond stands out because, in the span of just 18 months, it sparked a self-inflicted cash crunch that could bring the whole company down.

Time to Burn the Furniture

In conjunction with the terrible Q1 earnings report, Bed Bath & Beyond announced that it is pausing all store openings and remodels in order to reduce capital expenditures by at least $100 million this year. Interim CEO Sue Gove is also planning deep cost cuts in response to lower revenue. In short, Bed Bath & Beyond has been forced into cash conservation mode.

These moves highlight the extent of the company’s financial woes. The remodeling program was desperately needed and generated a sizable sales lift in the initial batch of renovated stores. Meanwhile, slashing store labor will save money in the short run, but the impact on customer service will make consumers even less likely to visit Bed Bath & Beyond stores going forward.

Even with lower capital spending, cost cuts, and inventory reductions, Bed Bath & Beyond will likely continue to burn cash over the next year or two. That will force it to increase its credit facility borrowings, further eroding liquidity compared to the recent level of $0.9 billion. Shrinking liquidity could become a self-fulfilling prophecy if vendors become nervous about the company’s solvency and demand shorter payment terms.

Making matters worse, Bed Bath & Beyond has $300 million of debt maturing in 2024. Those bonds due in 2024 recently traded for around 40 cents on the dollar, pointing to a high risk of default. Bed Bath & Beyond needs to save every penny that it can in the short run in the hope of being able to repay that debt so that it can avoid bankruptcy.

The problem is that Bed Bath & Beyond is burning the proverbial furniture to heat the house. The company’s looming cash crunch is forcing management to focus exclusively on reducing cash burn in the short term, undermining the brand’s long-term turnaround potential.

Little Hope for the Future

Bed Bath & Beyond isn’t quite dead yet, but its chances of surviving in its current form are slim. Home furnishings demand is retreating rapidly from the spending surge of the past two years. That will make it hard to stem the company’s cash burn even with aggressive belt-tightening and inventory reductions.

With liquidity already at suboptimal levels and $300 million of debt maturing in 2024, Bed Bath & Beyond will need a miraculously quick recovery to avoid bankruptcy. And in the event of bankruptcy, liquidation of the core Bed Bath & Beyond business is more likely than a debt restructuring. Creditors won’t have much interest in owning a shrinking, unprofitable business. (The somewhat more successful buybuy BABY chain would probably be sold.) In a few years, Bed Bath & Beyond could be no more than a URL and brand name owned by an ecommerce operator or brand management company.

The sad thing is that notwithstanding some initial tactical and execution errors, Tritton had a promising strategy for Bed Bath & Beyond. Improved store layouts, industry-standard omnichannel capabilities, a modernized supply chain, and a better mix of private versus national brands would have given the company a real shot at long-term success.

If Bed Bath & Beyond had maintained a strong balance sheet, it could have weathered the current lean times, adjusted its strategy, and continued to invest in its turnaround initiatives. Instead, it wasted $1 billion on share buybacks. That’s forcing the company to cut spending to the bone, all but ensuring its demise within a few years.

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