The Demise of Bed Bath and Beyond
Who wins? Who loses?
Bed Bath and Beyond is probably one of the biggest bankruptcies in the retail sector in recent times. And unfortunately, this one will probably not be salvaged.
Bed Bath and Beyond was founded in 1971 and went public in 1992. The company plans shutter all their stores and liquidate. Unfortunately, I did say this would happen in September 2022, and believe me, I did not want to be right about it.
This company has been under scrutiny for a while though and in 2019, it was the target of an activist campaign brough by Legion Partners, Macellum Capital Management, and Ancora Advisors — who criticized Bed Bath & Beyond’s leadership for excessive compensation and called for changes such as prioritizing profitability and cash flow by streamlining costs and improvements to its supply chain.
The campaign wasn’t all bad and the activist investors believed that the company could be turned around unlocking significant value and improving their returns.
The biggest criticism of the business model was “a failure to adapt”.
BBBY saw its margins dwindle over the years because of:
Inefficient merchandising strategy and decentralized supply chain management
Reliance on excessive discounting to get customers through the door
Poor adoption of online e-commerce strategies
Not to mention there were a lot of criticisms about the shopping at the stores themselves.
The entire presentation can be found here - on the SEC Website. It makes for an interesting flip through if you have the time.
While the company did respond to some of the activist investor issues - making board changes, management changes and selling off non-core assets - they didn’t ultimately implement the plan that was set forth.
Covid didn’t help either and sales fell further. To make matters worse, they decided to replace many of their branded kitchen products with non-branded, private label goods, which didn’t really appeal to customers.
But, what do you do when you want to ward off activist investors? Get your stock price high enough so that they leave you alone. One way to do that is to buyback stock. Over the years, the company spent over $11 billion to repurchase their stock, of with debt proceeds.
In the end, however, even the pandemic era of free money and low rates couldn’t keep them afloat. Their problems finally caught up to them.
Well, I don’t want to walk you through the bankruptcy and liquidation process. But more so what the implications are for the market. We will definitely see some spillover effect from this situation and it’s likely to have consequences.
For one thing, this market is already weak and we have a situation where retail is already under pressure. The inventory glut that started a few months ago has not been completely resolved and retailers are already discounting inventory heavily.
The home goods market has been particularly hit and you can see that in the numbers from Williams-Sonoma WSM 0.00 and Wayfair W 0.00. Releasing additional inventory at such “going-out-of-business: prices are sure put additional pressure on these companies who have already been discounting their product.
Some companies will benefit somewhat. The most obvious beneficiaries will be likes of Amazon and Target. But, seeing as how BBBY only raked in $4B to $5B in sales last year, this won’t make much of a dent with the big boys.
Companies like Big Lots BIG 0.00 and The Container Store TCS 0.00, however, may stand to win a little bit more. They have already announced that they will be accepting the expired coupons from BBBY customers for a limited period, although they do ask you to sign up their loyalty program first. This is probably something people should do anyway as an alternative to shopping at BBBY.
On the otherhand, a company like Helen of Troy HELE 0.00 stands to lose. They just reported this week that the revenue would be $35m from BBBY and further said that they've removed the impact from their books. It's not a massive impact to their $2B in revenue.
In the greater context of things, all these stores closing down will also mean plenty of empty real estate. The commercial property market is already suffering and it was just a matter of time until brick-and-mortar retail starts to close more locations. The current environment of higher rates means more landlords will be negotiating for higher lease rates to service their loans, if any. And I’m sure even the landlords that don’t have loans would increase rent in line with the market.
Finally, you have the sad situation of people getting laid off. We are already seeing plenty of layoffs in the tech sector and with the way financial conditions are tightening, it’s only a matter of time that unemployment starts to rise. In my article on Small Businesses, I wrote about how small businesses were unwilling to hire additional people. Most of these companies are struggling as it is, and they can’t make place for more people.
What have we learned?
If there’s anything to take away from this situation, it is this - No One Wins.
The management is to blame for everything that led up to the demise of Bed Bath and Beyond but, the market is not without fault either. The way the stock was played didn’t help with the situation. And Ryan Cohen coming in as an activist investor, only to turn tail and run, made things even worse.
As I was doing my research for this article, I found several YouTube videos of people claiming that they have lost money. I found even more Twitter posts of people hoping for one last squeeze on the stock price so that the could get out. While I don’t want to see people lose money, I also hate to see that these people have not learned their lesson. They remain delusional.
Worse still, they don’t even care what happens to a 52-year old company that has to shutter its doors putting thousands of people out of work.
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