Averting bankruptcy, Bed Bath & Beyond takes steps to strengthen its brands (NASDAQ:BBBY)

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Bed Bath & Beyond Inc. (NASDAQ:BBBY) is an omnichannel retailer that operates a chain of 955 retail stores and an e-commerce platform focused on household products. Rising debt and the threat of impending bankruptcy have led to an increase in short interest that pushed BBBY into meme stock notoriety. Short-term interests had broken down and remained during the Level 40% over the past three reporting periods and has resulted in frequent and sometimes daily fluctuations in the share price, but currently the market capitalization is less than $1 billion. With bankruptcy out of the way, BBBY’s price floor rises, while the upside is much higher on any news or even rumors of additional financial aid or the divestment of its subsidiary BABY.

August 31 [Readers may skip if familiar with the Investor Presentation]:

BBBY released a strategic and business update on Wednesday to drive growth and profitability and improve its balance sheet and cash flow.

At the end of May 2022, the company had 769 Bed Bath & Beyond stores, 135 buybuy BABY stores, as well as 51 stores in 6 states under the names Harmon, Harmon Face Values ​​or Face Values ​​focusing on health, beauty and consumables. The company has identified and begun the process of closing approximately 150 low-production Bed Bath & Beyond banner stores and simultaneously reducing their strength by approximately 20% in the corporate and supply chains. BBBY is also dropping 3 of the 9 owned brands and will offer 20pp more of the national brands that customers prefer to buy.

While still looking for a permanent Managing Director (or CEO), BBBY eliminated the roles of COO (John Hartmann) and Stores Manager (Gregg Melnick). Hartmann had served as COO and also President of BABY since May 18, 2020, having been recruited after Mark Tritton was named President and CEO on November 4, 2019. Tritton and Hartmann were the key executives in charge of day-to-day operations for the past two years. , and the inability to turn the company’s situation around for whatever reason ultimately rested on their shoulders.

Oversight responsibilities for Merchandising, Planning & Allocation, Brand Marketing and Stores now fall to two newly created leadership positions. Mara Sirhal, General Manager of Harmon and promoted in the first quarter to Director of Merchandising for the Bed Bath & Beyond banner, has been named Executive Vice President and Brand President of Bed Bath & Beyond. Meanwhile, Patty Wu has been promoted to counterpart on the buybuy Baby side, rising from SVP and general manager. Both report to Sue Gove, Acting Director and CEO. All are industry veterans, but whether they can execute the plan better remains to be seen.

In addition to the strategic update, the company now plans to finalize more than $500 million in new financings, including a $130 million extension of its asset-backed loan (or ABL) maturing in August. 2026, and an initial financing of $375 million. last facility (or FILO) maturing in August 2027. BBBY has also made a market offering for up to 12 million common shares for general corporate purposes, including repayment of its debt, repurchases future shares and the financing of acquisitions. The common shares outstanding if this offer had taken place immediately would be 91,779,205 shares, i.e. a 13% dilution. If sold at the maximum offered price of $9.88 per share and after subtracting Jefferies’ 3% commission, BBBY would fetch $115 million.

Great importance was attached to the events of Wednesday, ostensibly made “in response to certain media inquiries” regarding GameStop (GME) President and 10% owner Ryan Cohen’s sale of his entire BBBY post. Without the need to announce management changes and the secondary, all the rest could have been deferred until the third quarter earnings report at the end of the month. Any expectation on the BABY merger/acquisition was premature. Cohen would not have made the rookie mistake of selling outside of the trading window open to insiders, which in most publicly traded companies typically begins 2-3 trading days after the previous quarter’s earnings release and ends 2-3 weeks before the end of the next fiscal quarter, which in this case was August 28. For the same reason, he would not have sold if he knew of such material non-public information about BABY.

Outlook:

BBBY gave a second-quarter sales forecast of $1.45 billion compared to the consensus estimate of $1.5 billion. It expects a 20% drop in comparable sales in the second quarter and a cash burn of $325 million. This, combined with their current funding and $139 million at the end of the first quarter, leaves them with $319 million.

As a result, analysts made day-to-day adjustments in the second quarter of -$1.59 to -$1.79 EPS. However, the company’s expected net loss, even taking into account $125 million of restructuring and transformation initiative expenses, impairment charges and income taxes, still comes in at -2.5. $EPS (= (325-125) / 79), indicating another profit loss, no matter what it’s worth.

Moving on to the third quarter, an improvement of just 10% down from $1.98 billion in 2021 would show sales of $1.79 billion and gross profit of $411 million on a 23% margin. Selling, general and administrative expenses reduced by $250 million $2.69 billion for fiscal year 2021 could mean $610 million in the third quarter and a net loss of around $200 million. Adjustments similar to the second quarter amount to -$0.81 EPS, which would easily exceed Street’s current estimate of -$1.42 EPS. If BBBY receives no additional funding beyond the secondary, the cash would be $234 million. Even the worst-case scenario of a continued 20% decline would result in revenue of $1.59 billion, EPS of -$1.31 (still above estimates) and $189 million in cash. Thus, the company may not feel the need to raise funds until the end of the fourth quarter.

Take away food :

  1. It’s risky to short even a stock, and there can still be trapped short positions in the $5-6 where the stock languished from mid-June to early August, although shorts can benefit from options purchase of Binary Tree and institutions have their own weapons. Memes can go up without a catalyst or reason, like BBBY did last month, not even peaking on the 16th as Cohen unloaded his first 5 million shares. That day, BBBY walked into the List of Reg SHO Thresholds and has been there ever since. Rule 203(B3) requires participants of a registered clearinghouse to immediately purchase shares if the failure to deliver continues for 13 consecutive settlement dayswhich could indicate additional buying volume on September 2 with ripple effects thereafter.
  2. BABY is on everyone’s watch list because only he is valued over a billion dollarssame among his skeptics, and aroused interest. If the company reveals that BABY earns at least $1.5 billion a year with a margin of 30 years or more, then a multiple of 15 times would indeed be worth billions.
  3. Hadrian Capital (which is short BBBY) and OmniScience Capital (which is long) both point to the difficulty of securing bailout funding. The due diligence and conviction of Sixth Street Partners or any FILO lender should not be underestimated, as they are paid last if a borrower defaults. If BBBY makes it into the fourth quarter and is still strapped for cash, it will likely have a new CEO by then, and lenders are generally more comfortable with executives who commit to being there for the long term.
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