4 Strategy Mistakes That Could Cut Bed Bath & Beyond Stock By 50%

A company is the shadow of its founders. If the founders’ obsession is to win by slashing costs for everything but the merchandise it sells, that mindset is likely to persist well after the founders have left the scene.

This comes to mind in considering the sorry state of Union, New Jersey-based Bed Bath & Beyond
BBBY
(BBBY) — founded in 1971 by Warren Eisenberg and Leonard Feinstein — whose shares closed July 22 a whopping 94% below their January 2014 all-time high of about $80.

What is behind BBBY’s plunge? Many factors have collapsed its stock price, revenues, and cash flow.

Underlying these factors is a lingering mindset that started with Eisenberg and Feinstein. As I wrote in Goliath Strikes Back, they believed that success flowed from an obsession with minimizing costs – to wit, they banned Post-it notes and reluctantly spent the minimum amount to develop a bare-bones ecommerce capability.

This approach — which was developed in the 1970s before ecommerce existed — enabled BBBY to prosper by selling brand name merchandise at a 20% discount.

Of course the world has changed since then and the absence of a world-class ecommerce capability integrated with a retailer’s supply chain is the kiss of death.

With 32.4% of its float sold short at the end of June, that weak back office is an important reason that BBBY’s shares could drop 50% below its current $5 a share. Those reasons include:

  • Weak cash position
  • Shrinking sales
  • Poor merchandising
  • Weak systems

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(I have no financial interest in the securities mentioned in this post).

Weak cash position

BBBY’s cash position is very weak and it does not take much imagination to see it running out. At the end of May 2022, its balance sheet sported a mere $108 million in cash — down 75% from the previous quarter. During that quarter its free cash flow was negative $488 million.

Unless it can replenish its cash reserves, another such quarter and BBBY will be out of money. As the Wall Street Journal reported, BBBY is “working with advisers on cash management and trying to find a buyer for its Buybuy Baby business [which could be worth $800 million.]”

This situation leaves a bad taste in the mouth of David Silverman, senior director at Fitch Ratings. He told the Journal that BBBY “appears to be in a bit of a free fall operationally. The liquidity concerns are quite real and will likely get worse over the next quarter or two.”

Behind this cash conflagration is former CEO, Mark Tritton, who joined from Target
TGT
in November 2019 where he had been chief of merchandising. Tritton generated $250 million in cash by selling some of BBBY’s real estate. He also divested its Christmas Tree Shops and Cost Plus World Market chains.

Tritton also spent money — most pointlessly in my view — on stock buybacks ($643 million worth in 2021 and early 2022). BBBY also spent an unspecified amount on “overhauling stores to make them less cluttered, scaling back discounts and replacing national brands with new, private-label goods,” according to the Journal.

It would not take much for BBBY’s suppliers to get nervous about whether they will get paid for the goods they ship to its stores. Jason Haas, an analyst with Bank of America, said in a research note that BBBY’s liquidity situation could get more precarious if “vendors tighten or shorten payment terms,” reported the Journal.

BBBY is trying to preserve its cash by reducing capital expenditures by $100 million for the rest of the 2022 fiscal year. Specifically, it plans to spend $300 million — less than its $400 million plan — by pausing “remodels and new store openings for the remainder of Fiscal 2022,” noted TipRanks.

On July 21, ratings agency Moody’s downgraded BBBY’s debt rating from B2 to Caa2 with a negative outlook. Moody’s Senior Vice President Christina Boni cited its sharp decline in revenue and cash flow, profitability problems, and the misalignment between its private label inventory — which must be “cleared” — and the national brands consumers prefer even as demand weakens.

Shrinking sales

There does not seem to be much hope that BBBY can reverse plunging sales. In the May-ending quarter, revenues of $1.46 billion fell 25% from the year before — $50 million short of the consensus estimate. Its adjusted net loss was $2.83 per share more than twice as bad as the estimated loss of $1.39, according to TipRanks.

BBBY’s suffering is due in part to macroeconomic trends — such as changes in consumer spending — from buying home furnishings to spending on travel, restaurants, and in-person entertainment.

What’s more, rising interest rates have crimped new home purchases (the home sector accounts for 70% of BBBY’s net sales). In the latest quarter, its comparable sales fell 24% in stores and 21% in the digital channel.

Sue Gove — who replaced the jettisoned Tritton and is now interim CEO — sees a general decline in demand. As she said, during the quarter consumer sentiment deteriorated due to “steep inflation and fluctuations in purchasing patterns leading to significant dislocation in our sales and inventory,” noted TipRanks.

Management expects to resolve these problems through “inventory optimization and adjusted SG&A expense” which will enable sales to grow.

With rising interest rates and high inflation, I question whether BBBY is being overly optimistic about a second half recovery.

Poor merchandising

It is obvious that retailers should stock products that consumers want to buy.

Surprisingly, Tritton did not do that for BBBY. Instead, he tried to replicate a strategy that had been profitable for other retailers — selling private label products (knock offs of popular brands at a lower price).

He mistakenly acted as though he alone could fix what ailed BBBY. To that end, Tritton imposed corporate merchandising policies on each store and ignored what motivated BBBY consumers to buy.

From Local to Centralized Buying

One good thing that BBBY’s founders did was to shun centralized buying and allow store managers to purchase 70% of the products sold in their stores. For example, store managers on the coasts knew that consumers there liked duvet covers while midwestern store managers provided comforters which their consumers preferred, noted the Wall Street Journal.

Sadly for BBBY investors, customers, and store managers; Tritton decided to centralize buying so BBBY could get the best prices for private label products from factories.

Local store managers lost their power to tailor their assortment to the needs of their communities. Instead, corporate merchandisers told local stores “what to buy and where to place the items in stores,” noted the Journal.

Sadly this centralization landed merchandise in stores that local consumers did not want to buy. PJ Gumz, an Irvine, Calif. store manager who left when BBBY closed her store, said, “We’d get large quantities of stuff that we couldn’t sell. [We] once got a shipment of 95 purple rugs under the Wild Sage private brand that she had to discount by 80%,” reported the Journal.

Not Supplying Products That Customers Want to Buy

BBBY clearly did not ask consumers whether they would buy its private label merchandise.

Before the pandemic, BBBY tried to clear the stores of branded merchandise to make room for the private label items. BBBY stopped ordering popular brands like All-Clad cookware, OXO kitchen gadgets and Mikasa china and heavily discounted the remaining inventory to clear it out of the stores.

When the pandemic hit, factories closed, BBBY’s shelves were empty and when they finally filled up with the private-label goods, “they didn’t resonate with shoppers,” according to the Journal.

As Gumz explained, “My customers would look at the private label and say, ‘What is this?’ [when I] tried to persuade [them to buy [our private label] dishes, they’d say, ‘Where is Mikasa?’”

Ignoring what its loyal consumers want to buy has cost BBBY dearly. For example, Sarah Penrod, a professional chef, used to buy All-Clad cookware and Wüsthof knives from BBBY on a regular basis. She has jumped ship because the retailer no longer stocks what she wants to buy.

Weak systems

During the pandemic, the winners were retailers that could offer omni-channel: the ability for consumers to place orders online, pick them up at the store the next day, have them delivered to their home promptly, or — as lockdowns eased — even shop for and buy them in the store.

To do that well, retailers needed responsive and efficient supply chains. That means websites and apps that made it easy for consumers to place orders coupled with the ability to get the right merchandise delivered to warehouses and stores on a timely basis.

BBBY lacked such a system which cost it significant sales when people were buying home goods early in the pandemic. As the Journal wrote, BBBY’s “supply chain was antiquated, its website was clunky and it didn’t offer services like buy-online, pick-up-in-store that many retailers had rolled out years earlier.”

BBBY said Tritton improved its systems during his tenure. As Eric Mangan, a company spokesman told the Journal, Tritton presided over the improvement of BBBY’s website, the upgrading of its mobile app’s search and navigation capabilities, the launch of a third-party sellers marketplace, and the addition or expansion of “buy-online, pickup-in store, curbside pickup and same-day delivery.”

The reason private label worked for Target, Macy’s and other retailers was that unlike BBBY, they had spent decades making it work. To do that, they developed designs, sourced teams to manufacture them, spent heavily to advertise them, and built distribution centers to import items directly from Asia.

Will BBBY Stock Lose 50% of Its Value?

There was optimism on July 21 due to news that Freeman Capital — which took a 6.2% stake in BBBY — had called for the company to restructure its debt and issue $1 billion in bonds.

Sadly, on July 22 its stock fell 12.1% — possibly on word that Haas stuck with his price target of $2.40. Haas argued that Freeman’s restructuring plan is not realistic, noting, “The company’s CEO and a number of other executives recently departed, the turnaround strategy has not worked as planned, inventories are bloated and consumers are broadly pulling back on discretionary spending.”

BBBY has many improvement opportunities and little time or cash with which to capture them.

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