Last Thursday Bed Bath and Beyond (BBBY) warned it’s running out of cash and is considering bankruptcy.
(For those not familiar with the company, BBBY is a US-based home furnishing retailer, with bedding, bath, kitchen food prep, home organization, indoor décor, baby and personal care products in its portfolio.)
Now, a bankruptcy is rarely a result of only one event / cause. In BBBY case, it would be a classic mix of a challenged business model, high leverage, and a bad financial policy.
BBBY’s business model is heavily challenged, as they operate in a highly competitive environment where they compete with other national, regional, and local physical and online retailers, including department stores, specialty stores, off-price stores, mass merchandise stores and online only retailers. Basically, the products they sell can be purchased almost anywhere. And don’t forget, it’s a seasonal business in a discretionary segment, which means its results will likely be highly volatile over the cycle.
There are many articles available online about their operational failures, so I will not list them here, however, let’s just say that their sales have been decreasing approx. 15% p.a. over the last 2,5 years.
During the last 3,5 years, they have accumulated $2,1bn of losses, with EBITDA margin turning negative in 2022 and HY2023. Its profitability and operating cash flow have been rapidly deteriorating (they’ve burnt $1,1bn over the last 1,5 years, and $800m in 6 months this year only!). Their Net Leverage Ratio was above 10x since 2020 (at least), which clearly indicated the need for a restructuring.
They actually initiated the restructuring process, they’ve closed some stores, optimised portfolio, but…
…they continued with their bad financial policy!
Over the last 2,5 years, when the signs of trouble were clearly visible, they’ve spent $1,0bn on share repurchases. This amounts to 2/3 of their outstanding bond debt! Their share repurchases over time were so big that their equity turned negative. (The same goes for McDonald’s and Starbucks, but their shares are actually worth something compared to shares of a company near bankruptcy…)
But why do lenders allow that?
The largest portion of BBBY’s debt relates to bonds issued in 2014 with maturities in 2024, 2034, and 2044 (!), and operating leases. The cov-lite bonds were issued in good times, when limitations on share repurchases were not an issue as the company performed well. So, the bondholders probably can’t do much. The providers of operating leases normally do not care that much about that as it is a different type of financing.
But there is an ABL facility (effectively a liquidity credit line), where lenders should (and could?) have taken a more stringent approach. The ABL facility got even extended and increased in August this year (?!), in addition to the newly approved FILO facility (again ?!). These lenders seem to have taken a huge bet on the success of BBBY’s turnaround…The best sign for that was the warning issued last Thursday! Basically, it’s been only four months since the approval of new loans…
If BBBY hadn’t repurchased all those shares, the $1,0bn would have come in handy to buy some time to restructure the business…
P.S. BBBY is late with their Q3 results submission…definitely not a good sign!