Why Bed Bath & Beyond's CEO stock purchase is a sign of stress, not strength

Published Sat, Jul 9 20228:51 AM EDT

Christina Cheddar Berk @in/christina-cheddar-berk-b864404/

Many investors take it as a good sign when a CEO puts their own cash into the company they run. After all, who knows better what opportunities the business has? Unfortunately, it may not always be the case. On Wednesday, filings with the Securities and Exchange Commission revealed Bed Bath & Beyond interim CEO Sue Gove purchased $230,500 worth of stock , while directors Harriet Edelman and Jeff Kirwan ponied up nearly $50,000 each to add to their holdings. Bed Bath & Beyond's shares jumped more than 20% in Thursday's trading on the news. But the home goods retailer is not only struggling, it has serious liquidity issues. In fact, Gove's purchase could be seen as a sign of weakness. Some say it is an attempt to conjure up more confidence about Bed Bath & Beyond's future as it prepares for the critical holiday shopping season. It also could be a gesture to appease activist investor Ryan Cohen. The billionaire founder of online pet retailer Chewy and current chairman of GameStop has been a Bed Bath & Beyond shareholder through his investment firm RC Ventures. Cohen has been agitating for change at the company for months, and has long been critical of management teams that don't have some skin in the game. Cohen has been reiterating this stance on Twitter since last week's ouster of Mark Tritton , Bed Bath & Beyond's previous CEO. Tritton was forced out after the company reported bleak first-quarter results, with same-store sales that dove 27%. Through a spokesman, Cohen declined to comment. "At best, this is window dressing," Anthony Chukumba, an analyst at Loop Capital, said when asked about the insider purchases. "I mean, it doesn't change in any way, shape or form the fundamental story, and the fundamental story is terrible." Chukumba currently has a sell rating on the stock and is increasingly concerned that a Chapter 11 bankruptcy filing is on the horizon. A meme-stock darling in a cash crunch Bed Bath & Beyond's stock was caught up in the meme-stock frenzy. Its shares saw brief pops of interest that fueled enormous rallies. But interest has fizzled and the stock is down more than 65% since the start of the year. It closed Friday at $5.09. Gove's challenges at Bed Bath & Beyond are numerous, but cash is an urgent one. The retailer burned through more than $500 million in its fiscal first quarter ended May 28, leaving it with balance of about $100 million in cash, and $700 million on its revolving credit line. In a research note, Bank of America analyst Jason Haas said that he is modeling Bed Bath & Beyond to burn through $200 million in cash in its fiscal second quarter and $100 million in its third. Then, his model projects the company will have an inflow of $200 million as it sells through its inventory during the holidays. This scenario can only play out if Bed Bath & Beyond has shelves stocked with the kind of merchandise shoppers want to buy. One obstacle management could face is if fearful vendors change credit terms. This has happened to other retailers in the past, most notably, Sears. And it would make an already bad situation worse. Vendors are typically unsecured creditors in bankruptcy court proceedings, and that can leave them on the hook for big losses if a retailer seeks Chapter 11 protection. To limit their risk, vendors may cut back on shipments to a troubled retailer – or stop supplying goods entirely. The other option is to demand bigger payments up front, or shorter payment periods. The impact can be dramatic. Bank of America's Haas calculated that if suppliers reduced payment periods from 60 days to 30, Bed Bath & Beyond would have a cash outflow of $400 million. That's a difficult position for it to support with its current liquidity, Haas said. Finding liquidity It's possible Gove expects to provide Bed Bath & Beyond with a financial cushion by raising money through new stock or debt issuance. Loop's Chukumba doubts Bed Bath & Beyond could raise more funds. Bed Bath & Beyond was not immediately available for comment. But in its latest earnings call, chief financial officer Gustavo Arnal said the company had sufficient liquidity. "We have sufficient liquidity within our credit facility as we speak, and working with [Berkeley Research Group], working with our financial advisors, there are avenues that we're exploring to even increase further our liquidity and navigate through the working capital cycle, particularly in the next two quarters, given the seasonality of our business," Arnal said. "So we are confident in our ability to manage cash, liquidity, strengthen the balance sheet, and be very focused on where we invest and where we take costs out." In conjunction with the earnings report, Bed Bath & Beyond announced it had hired consulting firm Berkeley Research Group to help with its cash, inventory and balance sheet management. Berkeley has worked with a number of troubled retailers, including Modell's, Things Remembered and Gymboree. These three retailers ultimately sought bankruptcy protection. Gove isn't a newcomer to the company or the industry. She has more than three decades of industry experience as an executive at golf equipment retailer Golfsmith and jeweler Zale and as a retail restructuring advisor. Gove also has been on Bed Bath & Beyond's board since 2019, and served on its strategy committee. The company's struggles and precarious financial situation are well known to her. Tritton's efforts at Bed Bath & Beyond Bed Bath & Beyond was already floundering when Tritton, a former Target executive, joined three years ago. He was the first CEO to lead the retailer that hadn't grown up in its ranks. He moved quickly to bring in his own team and tried to implement some of the strategies that had been so successful for him as Target's chief merchant. Most notably, he launched a number of private label brands. At the same time, he scaled back on coupons, which proved to not be popular with Bed Bath & Beyond's most loyal customers. The combination of these two moves may have been his undoing. The newer store brands didn't have time to gain traction and bring in new shoppers. At the same time, the store's base fled when the discounts they enjoyed were taken away. Tritton's other efforts should have improved its financial position. He sold half the company's real estate, reaping more than $250 million in proceeds, and he ditched noncore businesses such as Cost Plus World Market and Christmas Tree Shops. But some of that money was put toward renovating stores to make them appear less cluttered as part of his turnaround plan. The company also accelerated the pace of a $1 billion share repurchase program. That decision is now being questioned. "Them buying back stock so aggressively when they were in the midst of a turnaround that wasn't going particularly well was nonsensical," Chukumba said. "It made no sense whatsoever. They should have been preserving their liquidity." Now, Tritton and many other executives are out. Chief accounting officer John Barresi, chief merchant Joe Hartsig and SVP of financial planning and analysis Heather Plutino have all left. Buybuy Baby's fate? Cohen has been pushing for the sale or spin off of buybuy Baby , but separating the business could leave Bed Bath & Beyond in an even worse financial position, according to analysts. Buybuy Baby is the star of the company's portfolio. It has continued to grow sales, and has a strong position in the category. During the recent earnings call, Edelman, Bed Bath & Beyond's independent chair, said the company is working to determine buybuy Baby's future. "The business is a very attractive business , and we're not alone in appreciating its value," Gove added, on the call. "We know there is interest." Chukumba recently looked at other companies he had previously covered that went bankrupt to see if there were any parallels to Bed Bath & Beyond's situation. He said the most surprising thing he discovered was that the companies he examined — Circuit City, HHgregg and Pier 1 Imports — all had better sales trends in the two quarters before they filed for bankruptcy protection than Bed Bath & Beyond has now. Also, all three retailers had less levered balance sheets, he said. Bed Bath & Beyond has $1.27 billion in net debt, while HHgregg only had $28 million in net debt when it filed. Pier One had $346 million, and Circuit City had $189 million. Retail trends also aren't going in the company's favor. The economy is slowing and retailers, including Walmart and Target, have found themselves with excess inventory. "They [Bed Bath & Beyond] were struggling when everyone else was doing well," he said. "What do you think's going to happen when suddenly the macro, instead of being this massive tailwind, is now a pretty significant headwind?"