With its stock down a jaw-dropping 77% year to date, Bed Bath & Beyond (BBBY) has seen some of the worst that the 2022 bear market has had to offer. But unfortunately for investors, the embattled brick-and-mortar retailer isn't out of the woods yet. With a weak competitive moat and deteriorating financials, the downside could be just getting started. 

What went wrong for Bed Bath and Beyond?

Founded in 1971, Bed Bath & Beyond is a retail store focused on home goods and decor. It set itself apart with its niche focus and massive assortment of products. But while this strategy seems to have worked for over four decades, the company didn't keep up with evolving consumer tastes -- especially as e-commerce rivals like Amazon offer more selection with the convenience of rapid home delivery. 

Bed Bath & Beyond's second-quarter earnings report highlight the effects of these challenges. Net sales fell 28% year over year to $1.4 billion, while operating losses spiraled from $84.1 million to $346.2 million -- an increase of more than threefold. Bed Bath & Beyond's balance sheet is also weakening, with long-term debt jumping 47% to $1.73 billion (compared to just $135.3 million in cash). The high leverage could present a risk of bankruptcy if the company can't stem its cash burn over the long term. 

A weak economic moat 

Like most struggling companies, Bad Bath & Beyond has a turnaround strategy that involves closing underperforming locations to cut costs and optimize operations. As of 2022, the company has 953 stores, down from a peak of 1,552 in 2018. While this move will lead to near-term revenue declines, management aims to emerge leaner and more profitable. 

But while cost-cutting looks like a promising way to bring cash burn under control, the turnaround efforts look unlikely to fix Bed Bath & Beyond's fundamental problem, which is a lack of an economic moat -- the ability to protect its market share against rivals. 

Red stock chart flashing sell

Image source: Getty images.

While Bed Bath & Beyond's focus on home goods historically helped it stand out against generalist big-box retailers like Walmart and Target, it has struggled to protect itself against competition from e-commerce companies like Amazon, which offer more variety and convenience. 

Management hasn't neglected the digital opportunity, which now represents almost 40% of Bed Bath & Beyond's sales. That said, practically anyone can open an e-commerce store nowadays, and aside from its fading brand, there is little to make Bed Bath & Beyond stand out in this highly competitive space. The company saw its digital sales drop 22% in the third quarter, and future weakness looks likely because of its weak moat. 

A cheap stock isn't always a good deal 

With a price-to-sales multiple of just 0.04, shares in Bed Bath & Beyond are dirt-cheap compared to a 2.5 multiple for the S&P 500. But a cheap stock isn't always a good deal. Declining financials and a nonexistent economic moat mean Bed Bath & Beyond's long-term decline might be far from over.