In early January, Bed Bath & Beyond (BBBY) confirmed it was teetering on the brink of bankruptcy. In a press release, it admitted there was "substantial doubt" it could stay in business based on its "recurring losses and negative cash flow from operations" in the first nine months of 2022 and said it was considering "all strategic alternatives" -- including restructuring its debt and selling its assets -- to stay afloat.
That warning shouldn't surprise anyone. The big-box retailer hasn't grown its revenue or posted a profit on a generally accepted accounting principles (GAAP) basis since fiscal 2017 (which ended in March 2018). It failed to shrink its cavernous stores, streamline its business, and expand its e-commerce business in a timely manner to counter intense competition from Amazon, Walmart, Target, IKEA, and other better-run mass retailers.
Image source: Getty Images.
In other words, Bed Bath & Beyond became another victim of the "retail apocalypse" that decimated Sears, JCPenney, and other iconic retailers over the past 13 years. Even if the company raises some fresh cash by selling some assets, it's doubtful it can fulfill its interest payments on $1.5 billion of its $1.7 billion in long-term debt on Feb. 1. If it skips those payments, it will trigger a 30-day "grace period" countdown before it defaults.
Some speculative investors are still betting on the retailer being saved by an 11th-hour deal, but I wouldn't touch this volatile stock right now. Instead, I'd like to look back at three other aspects of Bed Bath & Beyond's business which only the smartest and shrewdest investors have likely noticed.
1. It was accused of nepotism
When a trio of activist hedge funds overthrew Bed Bath & Beyond's board and ousted its CEO Steven Temares in 2019, they accused the company of dooming itself with rampant nepotism. They highlighted its 2007 $67 million acquisition of Buy Buy Baby, which was founded by co-founder Leonard Feinstein's two sons, as a prime example. As part of that deal, it paid off $19 million of Buy Buy Baby's debt, which was held by the Feinstein family. Another controversial deal was its acquisition of Chef Central, a retailer that was founded by the son of Bed Bath & Beyond's co-founder Warren Eisenberg, for $1 million in 2017.
Between fiscal 2003 and 2017, Bed Bath & Beyond's co-founders and CEO Steven Temares paid themselves a combined $313 million as the retailer's market cap shrank by about $8 billion. All those ugly accusations led to the shakeup of its board, the hiring of Target's chief merchandising officer Mark Tritton as its new CEO, and the mass firing of its C-suite. But those turnaround efforts came far too late -- and were ultimately halted by the one-two punch of COVID-19 and inflation.
2. Its loyalty plans were unsustainable
In 2017, Bed Bath & Beyond launched a membership plan called Beyond+ to catch up to similar services like Amazon Prime. For $29 a year, its customers would receive 20% discounts on their entire purchases as well as free shipping for online orders of all regular-sized products. Simple math suggested the company would lose money with each new member it gained, yet it continued to promote this loss-leading plan to gain new customers and boost its sales. It even gave out $29 digital gift cards with each Beyond+ subscription in late 2020, which essentially made the service free for a year.
Last year, it replaced Beyond+ with Welcome Rewards+. This new plan still costs $29 a year and provides 20% discounts, but piled on even more perks like a $10 signup bonus, bonus points that could be converted to cash savings, and four free same-day deliveries each year. It also added a free Welcome Rewards tier that only provided bonus points.
In short, it doubled down on its margin-crushing discounts -- which it had already been doing with an ongoing flood of coupons -- but failed to meaningfully boost its revenues. That's why its gross margins collapsed over the past five years.
Source: YCharts.
3. Its insiders aren't optimistic about its future
In the second half of 2022, Mark Tritton was fired, CFO Gustavo Arnal passed away, and several other top executives -- including chief customer and technology officer Rafeh Masood -- resigned.
Sue Gove, who succeeded Tritton last June, tried to calm investors by scooping up $230,500 in shares in early July, but the company's other insiders aren't as optimistic. Over the past 12 months, they still sold nearly eight times as many as they bought. During that same period, Bed Bath & Beyond's stock shed more than three-quarters of its value.
Could things have turned out differently?
Bed Bath & Beyond, like Sears and JCPenney, failed to spot the disruptive threats until it was too late. It's been closing down its stores, trimming its workforce, and liquidating its excess inventories with steep markdowns -- but none of those efforts are boosting its sales or profits. So, for now, all investors can do is wait for its liabilities to overwhelm its assets.
