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

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

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

The company is the shadow of the founder. If a founder’s obsession is to win by cutting the cost of everything but the goods they sell, that mindset is likely to persist long after the founder leaves the field.

Given the poor state of unions, which brings me to this point, New Jersey-based Bed Bath & Beyond BBBY (BBBY) — founded in 1971 by Warren Eisenberg and Leonard Feinstein — was trading at a much higher price at the close on July 22. Shares fell 94% in January 2014 – a time high of around $80.

What’s behind the BBBY slump? A number of factors contributed to the collapse of its share price, revenue and cash flow.

Behind these factors is a lingering mindset that began with Eisenberg and Feinstein. As I wrote in Goliath Strikes Back, they believe that success stems from an obsession with minimizing costs – that is, they forbid the use of post-it notes and reluctantly spend the least amount of money to develop basic e-commerce capabilities .

This approach, developed in the 1970s before the advent of e-commerce, allowed BBBY to thrive by selling branded merchandise at a 20% discount.

Of course, the world has changed since then, and the lack of world-class e-commerce capabilities integrated with a retailer’s supply chain is the kiss of death.

At the end of June, 32.4% of its outstanding shares were sold short, and the weak back office is a big reason why BBBY stock could be down 50% from its current $5 per share. These reasons include:

Weak cash position, shrinking sales, poor sales, weak system

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

poor cash position

BBBY’s cash position is so weak that it doesn’t take too long to see it run out. At the end of May 2022, its balance sheet had just $108 million in cash, down 75% from the previous quarter. During the quarter, its free cash flow was negative $488 million.

Another quarter like this and BBBY will be out of money unless it can replenish its cash reserves.As The Wall Street Journal reported, BBBY “is working with cash management advisors and trying to find a buyer for its Buybuy Baby business [which could be worth $800 million.]”

The situation left a bad impression on the lips of David Silverman, a senior director at Fitch Ratings. He told The Wall Street Journal that BBBY “appears to be in free fall operationally. Liquidity concerns are very real and will likely get worse over the next quarter or two.”

Behind the cash fire is former CEO Mark Tritton, who joined from Target TGT in November 2019, where he was head of merchandising. Tritton received $250 million in cash from the sale of some of BBBY’s real estate. He also spun off its Christmas tree store and cost-plus World Market chain.

Tritton is also spending on share buybacks (worth $643 million in 2021 and early 2022) — which, in my opinion, is moot. BBBY also spent an unspecified amount on “overhauling stores to reduce clutter, scale back discounts and replace domestic brands with new private label items,” according to the Wall Street Journal.

BBBY’s suppliers don’t have to worry about whether they’ll get paid for the goods shipped to their stores. BBBY’s liquidity position could become more volatile if “suppliers tighten or shorten payment terms,” ​​Bank of America analyst Jason Haas said in a research note, The Wall Street Journal reported.

BBBY is trying to preserve its cash by reducing capital spending by $100 million over the remainder of fiscal 2022. Specifically, TipRanks noted, it plans to spend $300 million — down from its $400 million plan — to suspend “renovations and new store openings for the remainder of fiscal 2022.”

On July 21, rating agency Moody’s downgraded BBBY’s debt rating from B2 to Caa2 with a negative outlook. Moody’s Senior Vice President Christina Boni cites sharp declines in its revenue and cash flow, profitability issues and private label inventory (which must be “cleaned up”) versus national brands that consumers prefer even when demand weakens dislocation between.

Shrinking sales

BBBY’s hopes of reversing the decline in sales appear to be slim. In the May-ended quarter, revenue was $1.46 billion, down 25% from a year earlier and $50 million below consensus estimates. Its adjusted net loss of $2.83 per share was more than double the estimated loss of $1.39, according to TipRanks.

Part of BBBY’s misery is attributable to macroeconomic trends — such as changes in consumer spending — from buying household goods to spending on travel, restaurants and in-person entertainment.

What’s more, rising interest rates have dampened new home purchases, which account for 70% of BBBY’s net sales. In the most recent quarter, comparable sales at its brick-and-mortar stores were down 24%, and sales in digital channels were down 21%.

Sue Gove, who replaced the ditched Tritton and served as interim chief executive, sees a general drop in demand. As she puts it, consumer sentiment deteriorated this quarter due to “sharp inflation and fluctuations in buying patterns that have caused our sales and inventory to be significantly misaligned,” TipRanks noted.

Management hopes to address these issues with “inventory optimization and adjusted SG&A expense,” which will lead to higher sales.

With rising interest rates and high inflation, I question whether the BBBY is too optimistic about a recovery in the second half of the year.

bad pitch

Clearly, retailers should stock products that consumers want to buy.

Surprisingly, Tritton didn’t do it for BBBY. Instead, he tried to replicate a lucrative strategy for other retailers—selling private-label products (copying popular brands at lower prices).

He falsely acts as if only he can solve BBBY’s problems. To this end, Tritton implemented a corporate sales policy for each store, ignoring the incentives of BBBY consumers to buy.

From local to centralized procurement

One of the good things the founders of BBBY did was to avoid centralized purchasing and let store managers buy 70% of the products. For example, the Wall Street Journal noted that store managers on the coast know that consumers there love down comforters, while store managers in the Midwest offer comforters that consumers love.

Sadly for BBBY’s investors, customers and store managers; Tritton decided to centralize sourcing so BBBY could get the best prices on private label products from the factory.

Local store managers have lost the power to adjust the assortment of items according to the needs of the community. Instead, corporate buyers tell local stores “what to buy and where to put items in the store,” the WSJ noted.

Sadly, this centralization puts goods into stores where local consumers don’t want to buy. “We’re going to get a lot of stuff that doesn’t sell,” said PJ Gumz, a store manager in Irvine, Calif., who left after BBBY closed the store. [We] At one point she received a shipment of 95 purple rugs from Wild Sage’s own brand, and she had to discount it by 80 percent,” The Wall Street Journal reported.

Not offering products that customers want to buy

BBBY apparently didn’t ask consumers if they would buy its own brands.

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

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

As Gumz explains, “My clients will look at private label and say, ‘What’s this?’ [when I] try to persuade [them to buy [our private label] Dish, they’d say, ‘Where’s Mikasa? ‘”

Ignoring what loyal consumers want to buy has cost BBBY dearly. For example, professional chef Sarah Penrod used to regularly buy All-Clad cookware and Wüsthof knives from BBBY. She quit because the retailer no longer stocked what she wanted to buy.

weak system

During the pandemic, the winners are retailers who can offer omni-channel services: consumers can place an order online, pick up in-store the next day, have it delivered to their home in time, or — as lockdowns ease — even shop and shop Buy in store.

To do this, retailers need a responsive and efficient supply chain. This means that websites and apps make it easy for consumers to place orders and have the right items shipped to warehouses and stores in a timely manner.

BBBY lacked such a system, and it cost a lot to sell when people were buying household items in the early days of the pandemic. As The Wall Street Journal wrote, BBBY’s “supply chain is outdated, its website is clunky, and it doesn’t offer the buy-on-line, pick-up-in-store, etc. services that many retailers introduced years ago.”

Tritton has improved its systems during his tenure, BBBY said. As company spokesman Eric Mangan told The Wall Street Journal, Tritton hosted improvements to BBBY’s website, upgrades to its mobile app search and navigation features, the launch of a third-party seller marketplace and “buy-online, in-store pickup, Curbside pickup and same-day delivery.”

The reason private labels work for Target, Macy’s, and other retailers is that, unlike BBBY, it took them decades to make it work. To do this, they developed designs, found teams to manufacture them, spent huge amounts of money on advertising campaigns, and built distribution centers to import goods directly from Asia.

Will BBBY stock lose 50% of its value?

Markets were upbeat on July 21 after news that Freeman Capital, which owns a 6.2% stake in BBBY, called on the company to restructure its debt and issue $1 billion in bonds.

Sadly, on July 22, its shares fell 12.1% — likely because Haas stuck to its $2.40 price target. Haas dismissed Freeman’s restructuring plan as unrealistic, noting that “the company’s CEO and a number of other executives have recently departed, the turnaround strategy has not gone according to plan, inventory has ballooned, and a general shrinking of consumers can be a problem. discretionary spending.”

There are many opportunities for improvement in BBBY, but very little time or cash to seize them.

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