It's obvious things are bad at Bed Bath & Beyond (NASDAQ:BBBY), but were they so bad it needed to sell its headquarters and half its real estate? Well, yes, actually. For a business that once regularly touted how well it was able to generate cash, more recently the home goods retailer has been left scrounging in the couch cushions trying to dig up change.

But it just came up with a fistful of coins (and an odd assortment of hair clips, some old Cheerios, and a couple of dust bunnies) as it announced it sold 2.1 million square feet of commercial space in a sale leaseback arrangement with private equity that will net it about $250 million.

The deal includes its executive offices, a distribution center, and a whole bunch of its retail stores, but the quick infusion of cash gives it some breathing space as it readies a third quarter earnings report that's expected to be terrible.

Two women shop for throw pillows.

Image source: Getty Images.

From landlord to tenant

Bed Bath & Beyond has hinted strongly it needs to take action to unlock the value squirreled away on its balance sheet, whether it's the real estate it owns or the multitude of businesses it runs. While much of the speculation has centered on the latter, management told investors last quarter there was actually a lot of interest in its property and it was mulling over the offers. Then-interim CEO Mary Winston said the sale leaseback "could generate significant cash for the company."

The retailer sold the real estate to Oak Street Real Estate Capital, but will continue to occupy the properties under long-term leases.

A sale-leaseback can be a cheaper option than owning the real estate outright. Instead of being a landowner, which isn't the business Bed Bath & Beyond is in, it will become a tenant, with the resulting capital freed up for use in the business. But it also turns what is an asset on its balance sheet into a liability, which could increase its costs and restrict its ability to finance its needs. 

Cash is still king

While the $250 million is a sizable amount, generating cash has never really been a problem for Bed Bath & Beyond and it even ended the second quarter with almost $900 million in cash and equivalents. But where it used to be able to generate $1 billion or more in free cash flow, or the money left over after it pays its bills that it can use to invest in its business or return to shareholders, that has been greatly reduced.

At the end of the last quarter, it had generated just $270 million worth of free cash flow over the prior 12 months, about a third of what it produced two years ago. It indicates just how far Bed Bath & Beyond's business has fallen and why new CEO Mark Tritton cleaned out the C-suite of holdover executives.

A full plate

The fiscal third quarter is probably not going to be a good one. It had a substantial amount of inventory it needed to clear out -- some $1 billion worth over the next 18 months. It took a charge of $194 million related to that inventory, and while Bed Bath & Beyond believes that is all the writedowns it will need to take, that's still a lot of inventory it needs to work through that will be a drag on earnings and margins.

Bed Bath & Beyond said it's going to use the proceeds from the sale leaseback deal to reinvest in the business, buy back stock, and pay down debt. Share repurchases would seem to be a use of cash that it shouldn't bother with right now as it has more pressing matters than propping up earnings for investors. 

It still needs to figure out a way to get people shopping its brand again, whether it's at its physical stores or online. It's said it has targeted $350 million to $375 million in capital expenditures for 2019, with at least half going to technology, which is important, because much of what it sells can be found online at Amazon.com, Walmart, and elsewhere and it needs to differentiate itself to consumers to stand out.

Quick action is needed

Tritton is taking a lot of bold actions since moving over from Target and taking control of the home goods retailer, and while the shot of cash Bed Bath & Beyond gets from the deal gives it some breathing space, it's essentially a one-time infusion that will quickly mean little if it can't get its business fixed.

Pursuing strategies that result in a short-term boost to earnings without addressing the underlying problem of why its business was deteriorating in the first place only ensures that Bed Bath & Beyond will eventually be back where it began.