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Bed Bath & Beyond is the Titanic, and it’s sinking.

What’s their rescue plan?

Once the golden child of big-box stores, Bed Bath & Beyond is now struggling to stay afloat.

2020 appeared to be a turning point in Bed Bath & Beyond's turnaround strategy, with the company remodeling its stores, launching private labels, overhauling its C-suite, and selling off underperforming banners.

The retailer, like others in the home goods industry, benefited from increased demand at the start of the pandemic as consumers actively sought new products for their homes.

With Target veteran Mark Tritton at the helm, Bed Bath & Beyond was poised to succeed.

However, in its most recent quarter, the retailer reported that comparable sales fell 23% while net sales fell 25% year over year. Its losses climbed as well: Operating loss rose by more than $265 million, and net loss widened by more than $300 million.

And Tritton — who helped in Target’s transformation — along with Chief Merchandising Officer Joe Hartsig, exited their positions in late June.

“The turnaround has failed and the business is in such a bad state with such serious declines in sales and profitability. It was inevitable he had to leave both because what he had been doing hadn’t worked but also because investors increasingly had lost confidence in the trajectory that he was taking the business,” GlobalData Managing Director Neil Saunders said.

We’ve heard a lot recently about how the troubled Bed Bath & Beyond retail chain plans to solve its financial problems.

In an effort to reduce costs, the company announced in late August that it would change its merchandising to feature more national brands, would close 150 stores, would lay off 20% of its workforce, and might potentially sell 12 million shares of new stock, which at Friday's closing price would generate about $100 million. Of course, the tragic suicide of Chief Financial Officer Gustavo Arnal in recent days caused even more commotion.

So how did Bed Bath & Beyond get to this point?

Longstanding Problems

The problems at Bed Bath & Beyond started long before Tritton became CEO in late 2019.

Following an activist investor campaign, the company's board was overhauled in the spring of 2019, with co-founders Warren Eisenberg and Leonard Feinstein departing the board. After receiving calls for his resignation from those activist investors, then-CEO Steven Temares left his position in May of that year.

At the time, the company's financial situation was precarious. From 2018 to 2019, Bed Bath & Beyond moved from being a low default risk to being a medium default risk.

“It was in a state of decay,” Wedbush analyst Seth Basham said. “They were losing traction with their customer base, traffic was down and their omnichannel platform was not strong.”

When Tritton arrived in the fall of 2019, “he certainly did some things right initially to help stabilize the patient, so to speak,” Basham said, adding that under Tritton, the retailer introduced a number of initiatives, including expanding buy online, pick up in-store and curbside pickup. “But [he] also came in at a time pre-COVID where they were able to benefit from some of the COVID demand.”

Flaws in the Turnaround

While work was undoubtedly required to restore traffic and share to the company, Tritton's turnaround had many flaws.

“It’s very interesting because nothing on the surface is wrong with the plan that he put out,” Saunders said. “It all sounds logical, it all sounds pretty sensible. There are actually some things in there that needed to be changed. The big problem was that he came in very gung-ho and he overnight just ripped up the old playbook of Bed Bath & Beyond. He started to put in place a strategy that had really worked very well at Target. But he really paid far too little attention to whether that’s what the Bed Bath & Beyond customers wanted.”

The new initiatives alienated many of the company's loyal consumers while drawing in only a small number of new ones.

Early on in the pandemic, the company saw a spike in sales, which, according to Basham, misled management about the retailer's improvements.

“They were too optimistic that the improvements that they were seeing were because of internal changes they were making as opposed to market trends,” he said. “For probably the last 18 months they were losing market share. That would turn into a major issue if they persisted once the market growth slowed down. The market strength was unsustainable, so they definitely were misinterpreting that and misinterpreting the outlook for the market. This year, Mark anticipated that the market would still be growing. It’s turned down sharply in recent months.”

The growth rate for the overall home category, particularly items for the kitchen, bedroom, and multiroom, declined 10.8% between early 2020 and early 2022. This surfaced problems with the business's private label strategy. The business outlined intentions to introduce more than 10 owned brands over the course of a year and a half in the fall of 2020. The goal was to expand Bed Bath & Beyond's private label penetration from 10% to 30%.

Early in 2021, Bed Bath & Beyond relaunched Haven and introduced brands like Nestwell, Simply Essential, and Wild Sage. But according to Saunders, the brands themselves were disappointing.

“Some of those owned brands that were developed were not that great. The quality wasn’t good. There have been quite a lot of returns on some of the lines. Some of the price points are too high for the level of quality that’s being offered, ” Saunders said. “People talk about private label as being a good strategy, and it is, but it’s only a good strategy if you do a good job with it.”

In an apparent effort to reduce the cluttered appearance for which Bed Bath & Beyond stores had become known, a large number of underperforming SKUs from national brands were also removed as part of its merchandising strategy. However, this strategy went too far.

“When you go into a Bed, Bath & Beyond now, it’s a very bland store. It’s very, very ordinary. There’s nothing in there that’s particularly interesting,” Saunders said. “At least previously Bed Bath & Beyond had some excitement. I mean, it was a bit of a sort of flea market in there with stuff piled high. But that was a form of excitement for some people.”

The move shocked consumers, who generally have a deeper connection to national brands because they’re more well known.

Furthermore, when supply chain challenges disrupted the retail industry, Bed Bath & Beyond suffered from out-of-stocks as a result of relying too heavily on private labels and excluding national brands.

Compared to national brands, which often have product in the U.S. and can ship domestically, private labels' lead times were significantly longer since they were shipping from abroad, from regions like Asia, Basham noted.

Problems with Management

Bed Bath & Beyond suffered from macroeconomic factors like pandemic-driven demand declining and supply chain issues, but they are not entirely to blame for the company's issues.

The retailer owed around $1.4 billion in long-term debt as of May 28. But in November of last year, Bed Bath & Beyond revealed it had accelerated its $1 billion plan to repurchase shares, diverting funds that may have gone toward debt reduction or investment in the company's turnaround efforts. At the time, Bed Bath & Beyond touted its progress on share buybacks, saying it had already bought back $600 million and planned to repurchase the remaining $400 million before the fiscal year was over.

“Bed Bath & Beyond spent an absolute fortune on share buybacks. That wasn’t the right thing to do. It’s a very, very stupid thing to do given that the balance sheet is now in the red,” Saunders said, adding that it “really was to appease investors and to throw them something whilst the turnaround plan was taking place. But all it succeeded in doing is leaving the business in a very, very weak position.”

According to RapidRatings, Bed Bath & Beyond's financial health rating, which assesses the likelihood of default within a year, decreased from 68 (a low default risk) to 28 (a high default risk) between the first quarters of fiscal 2022 and 2023. Its core health rating — which measures the medium- to long-term sustainability and operational efficiency of a company — now sits at 30 (poor health).

The state of Bed Bath & Beyond's business and its failing turnaround prompted activist investors, including Chewy founder Ryan Cohen.

Cohen, who previously acquired an activist stake in GameStop and is now that retailer's chairman, also took a stake in Bed Bath & Beyond earlier this year. After describing Tritton's turnaround plan "scattershot," Cohen initiated a campaign to invoke change.

Last Tuesday, Cohen's investment firm disclosed that it will sell the shares of Bed Bath & Beyond that it had purchased between January and March this year, around 11.8% of the company's outstanding shares. While Cohen is now exiting his activist stake in Bed Bath & Beyond, he managed to aggravate the business enough to spark change.

“He’s put a lot of pressure on the business,” Saunders said.

Given the financial state of the company, it would be unlikely to see Bed Bath & Beyond survive the next 12 months without a major financial event occurring, either filing for bankruptcy or selling itself.

The Future of Bed Bath & Beyond

Bed Bath & Beyond was once a leading home goods retailer, appealing to shoppers across the nation with its strategy of abundance. The beloved store, which lined strip malls nationwide, became known for its huge assortment of products spanning every color and style.

Over the years, it became a go-to for just about anything for the home and — true to its name — beyond.

But without a permanent CEO and CFO, and with its financial condition deteriorating, it's critical Bed Bath & Beyond addresses its numerous issues.

The company needs to work to fix its supply chain problems, stabilize its financial situation, and reassess its value proposition to customers.

As it looks for someone to lead a turnaround, which is likely to determine the fate of the retailer, Bed Bath & Beyond needs to prioritize a leader with deep operational expertise and experience with turnarounds.

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