Fiscal 2021 was a year to forget for Bed Bath & Beyond (BBBY). After entering the year with high hopes for a return to sales and earnings growth under new CEO Mark Tritton, the company repeatedly missed its targets.
Bed Bath & Beyond ended the year on a particularly sour note, as its recent fourth-quarter earnings report revealed. With business conditions expected to remain challenging, Bed Bath & Beyond's turnaround effort may be dead on arrival.
From bad to worse
Entering fiscal 2021, Bed Bath & Beyond expected to generate adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) between $500 million and $525 million, on revenue of $8 billion to $8.2 billion. After logging solid results in the first quarter, the company raised its revenue guidance range to between $8.2 billion and $8.4 billion, and its adjusted EBITDA guidance range to between $520 million and $540 million. At that time, Bed Bath & Beyond set a full-year target for adjusted earnings per share (EPS) of $1.40 to $1.55.
Unfortunately, the iconic retailer's business plans unraveled thereafter. Bed Bath & Beyond slashed its full-year forecast in September, and again in early January. By that point, management anticipated a full-year loss of up to $0.15 per share, and adjusted EBITDA between $290 million and $310 million on sales of approximately $7.9 billion.
Even that forecast proved hopelessly unrealistic. Bed Bath & Beyond's comparable sales plunged 12% in the fourth quarter, while surging supply-chain costs eroded its margins. Adjusted EBITDA turned negative with a loss of $30 million -- down $198 million year over year. This led to a quarterly adjusted net loss of $0.92 and a full-year net loss of $1.08.
Fiscal 2022 is off to an even worse start, with sales down more than 20% year over year so far due to softening demand and inventory shortages in key product categories. That will lead to another sizable loss this quarter. Management doesn't expect meaningful improvement until the second half of the fiscal year, at best.
Bed Bath & Beyond generated just $18 million of cash from operations last year, while it spent $354 million on capital expenditures. Thus, free cash flow was negative $336 million.
Despite this cash burn, Bed Bath & Beyond became increasingly aggressive about buying back stock as the year progressed. On a full-year basis, it spent $589 million on share repurchases, including fees. As a result, the company burned through two-thirds of its cash during fiscal 2021, ending the year with less than $500 million on hand, down from $1.4 billion a year earlier.
Bed Bath & Beyond spent another $40 million on share repurchases in March before finally pausing buybacks. Meanwhile, between the ongoing pressure on its earnings and the company's plan to increase capex to $400 million this year, Bed Bath & Beyond seems likely to burn hundreds of millions of dollars again in fiscal 2022. That would consume nearly all of its remaining cash.
Tough decisions ahead
Bed Bath & Beyond CEO Mark Tritton says that the company's recent struggles only add to the urgency of its turnaround investments. However, due to its poor financial results and wasteful buybacks, the retailer could soon find itself struggling to fund major capex projects.
For now, Bed Bath & Beyond has adequate liquidity of $1.4 billion including its revolving credit facility. But cash burn could make a significant dent in that figure over the next two years, barring a big improvement in business conditions. Additionally, the company has $300 million of debt maturing in 2024. Unless profitability recovers dramatically by then, it will be difficult to refinance that debt.
Bed Bath & Beyond may try to sell its more successful Buy Buy Baby business to raise cash. That alone wouldn't fix the company's balance sheet, though. It would be more prudent to issue stock to bolster the balance sheet -- reversing some of Bed Bath & Beyond's recent buybacks -- but there's no sign that management or the board is seriously considering that option.
At this point, management's plan amounts to a Hail Mary pass. Bed Bath & Beyond will plunge ahead with an aggressive, expensive turnaround plan that sounds good on paper but has not demonstrated success in the real world. If the plan succeeds once it is fully implemented, Bed Bath & Beyond shareholders could reap huge gains. Conversely, if sales momentum never returns, the questionable capital allocation moves of the past year will come back to haunt Bed Bath & Beyond and its shareholders.