In 2020, Bed Bath & Beyond appeared to be hitting its stride in its turnaround effort: remodeling stores, introducing private labels, overhauling its C-suite and selling off underperforming banners.
The retailer, like others selling home goods, was boosted by heightened demand during the onset of the pandemic as consumers actively sought out new products for their homes.
With Target veteran Mark Tritton at the helm, Bed Bath & Beyond was poised to succeed.
But in its most recent quarter, the retailer reported net sales fell 25% year over year, while comparable sales fell 23%. Its losses also grew: Operating loss increased by over $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. “I don't think it signals anything positive at all for Bed Bath & Beyond.”
Now, Bed Bath & Beyond is a high default risk, and experts predict the company will likely need to file for bankruptcy or be taken private through a sale in the next 12 months. In lowering its ratings on the retailer to CCC, S&P Global Ratings on Monday said the company could default on its debt or restructure “if its turn-around efforts do not gain significant traction.” The retailer also reportedly hired Kirkland & Ellis — a restructuring specialist law firm that has helped retailers like Toys R Us, J.C. Penney, Neiman Marcus and others go through Chapter 11 — to help with its debt load, according to a Bloomberg report just last week.
So how did Bed Bath & Beyond get to this point and why wasn’t it able to capitalize on increased demand?
Bed Bath & Beyond’s problems began well before Tritton took over as CEO in late 2019.
The company’s board was overhauled in the spring of 2019, including the departure of its co-founders Warren Eisenberg and Leonard Feinstein from the board, following an activist investor campaign. In May that year, then-CEO Steven Temares exited his role after calls from those activist investors for his resignation.
The company at the time was in a weak financial position. From 2018 to 2019, Bed Bath & Beyond had moved from being a low default risk to being a medium default risk, according to data from RapidRatings shared with Retail Dive.
“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.”
Missteps in the turnaround
While work certainly needed to be done to restore traffic and share to the business, Tritton’s turnaround had a number of missteps.
“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.”
A lot of core customers were alienated as a result of the new initiatives, while the business attracted few new customers, Saunders added. “The strategy itself wasn't necessarily wrong, but the execution of it was very inappropriate.”
The retailer experienced a boost in sales during the early months of the pandemic, which gave management a false read on its improvements, Basham said.
“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.”
Between early 2020 and early 2022, growth in the overall home category has declined 10.8%, according to research from 1010data provided to Retail Dive. Among the categories falling the most during that period were items for the kitchen, bedroom and multiroom, the firm found.
“[T]he rate of growth has slowed considerably as things started to open up, inflation set in and the opportunity to spend money on travel reemerged,” Jonah Ellin, chief product officer at 1010data, said in emailed comments.
Problems emerged around its private label strategy as well. The company outlined a plan to increase Bed Bath & Beyond’s private label penetration from 10% to 30% and announced in the fall of 2020 plans to launch more than 10 owned brands over the course of a year and a half.
“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. Some of the things weren't that well differentiated, they were just basically slapping the owned label on some cloths or some items of furniture,” 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.”
And now, the retailer is reportedly discontinuing one of those brands, Wild Sage, about a year after it launched.
Part of its merchandising strategy also included removing thousands of underperforming SKUs from national brands from its assortment, seemingly in an effort to cut through the clutter Bed Bath & Beyond stores had become known for. But the pendulum may have swung too far in that strategy.
“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. There's nothing in there that stands out. There's nothing that makes you say, ‘Oh, hey, you know, I'll go to Bed Bath & Beyond for that.’ It's just beige. It's very, very boring,” 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. It's: ‘What do I find? What are the bargains in there?’ It was a bit like the off-price model.”
The move shocked consumers, who generally have a deeper connection to national brands because they’re more well known.
There were “some missteps in the cadence and plans around their merchandising transformation,” Basham said. “They went too far with their owned brands in a short period of time in place of national brands, which have more credibility with their customers in the marketplace.”
And when supply chain challenges disrupted the retail industry, leaning heavily on private labels while cutting out national brands hurt Bed Bath & Beyond and led to out-of-stocks.
Private labels were shipping from overseas, from places like Asia, Basham noted, so the lead times were much longer than national brands, which generally have product in the U.S. and can ship domestically.
The home goods sector over the past several years has also gotten increasingly crowded, and retailers with greater access to capital and resources, like Target, Walmart and Amazon, took share during the pandemic.
“People are gravitating to more one-stop shopping, if they're doing it in person,” James Gellert, CEO of RapidRatings, said. “And when they're doing it online, certainly the Amazons and the Walmarts have found that they can capture greater loyalty through their programs than a Bed Bath & Beyond can.”
At the same time, areas that could have set Bed Bath & Beyond apart were neglected, like its registry business, Saunders noted.
“With bits of old stock and boxes in there, a few chairs that wouldn't look out of place in the DMV waiting room. You look at it and think, ‘This is where you expect people to plan their special day? One of the best moments of their entire life?’” he said. “I mean, it's just seriously lacking in thought and execution and consideration for the customer.”
Problems with management
Macroeconomic issues, like pandemic-driven demand waning and supply chain challenges, didn’t help Bed Bath & Beyond, but they can’t be blamed for all of the company’s problems.
As of May 28, the retailer’s long-term debt was about $1.4 billion. But last November, Bed Bath & Beyond announced it accelerated its $1 billion plan to repurchase shares, cash that could have been used to pay down debt or invest in its 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, which Gellert called “a very self-indulgent activity for a company that is operationally challenged.”
“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.”
Between the first quarter of fiscal 2022 and the first quarter of fiscal 2023, Bed Bath & Beyond’s financial health rating — which measures the likelihood of default in 12 months — dropped from a 68 (a low default risk) to a 28 (a high default risk), according to RapidRatings. Its core health rating — which measures the medium- to long-term sustainability and operational efficiency of a company — now sits at 30 (poor health).
“A 40-point drop is not unheard of but it is hard to do that for any company that is even marginally healthy,” Gellert said. “What concerns me particularly for Bed Bath & Beyond is that their increased losses and their use of cash are not changing marginally period to period. They're changing exponentially. They're in a real hole.”
With the help of Kirkland & Ellis, a restructuring could include new loans, refinancing existing loans or both.
While demand has declined for home goods in recent months, others in the sector have been able to fare better than Bed Bath & Beyond has.
Other retailers have “maintained some of that momentum into the current period and certainly haven't seen the losses and the attrition in customer numbers or in sales that Bed Bath & Beyond has seen,” Saunders said.
To make matters worse, consumers are now faced with inflationary pressure and other economic uncertainty, causing many to pull back on discretionary spending and dealing another blow to Bed Bath & Beyond’s future prospects.
“People are tightening their purse strings. There's obviously a little bit of pressure and stress on the way consumers are spending money in general, especially as you start to think about the impending or potential recession that some would argue we're already in,” Tim Derr, a partner in the consumer practice at Kearney, said. “There’s going to be a little bit more apprehension to spend in these other discretionary categories like investments in their home.”
The state of Bed Bath & Beyond’s business and its failing turnaround has brought on calls from activist investors, notably from Chewy founder Ryan Cohen.
Cohen, who previously took an activist stake in GameStop and is now that retailer’s chairman, had taken a stake in Bed Bath & Beyond earlier this year and set off on a campaign to invoke change after calling Tritton’s turnaround plan “scattershot.”
“From our vantage point, Bed Bath’s strategy looks far better in a PowerPoint deck than it does in practice,” Cohen wrote in a letter to Bed Bath & Beyond’s board back in March.
Cohen called for a sale of the BuyBuy Baby business, as well as the potential sale of the entire company. By late March, Cohen and his activist fund, RC Ventures, had entered into a cooperation agreement with Bed Bath & Beyond, which entailed adding three directors of RC Ventures’ choosing to its board and creating a group focused on “exploring alternatives to unlock greater value.”
Cohen’s investment firm on Tuesday announced it would sell its shares of Bed Bath & Beyond — about 11.8% of the company’s outstanding shares — which it acquired between January and March of this year. 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, Saunders agreed that a sale of the baby chain is likely necessary, and Gellert said 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.
Bed Bath & Beyond’s FRISK score from CreditRiskMonitor, which measures the probability of a publicly traded company filing for bankruptcy within a year, sits at 1. That indicates a 9.99% to 50% chance of filing for bankruptcy within the next 12 months.
“Given how little cash they have relative to their needs, I will give it inside of a year that they either have to consider bankruptcy or they are taken private,” Gellert said. “I would not see them existing in their current incarnation in 12 months.”
Without a permanent CEO and with its financial situation worsening, it’s critical Bed Bath & Beyond addresses a number of issues.
The company needs to work to stabilize its finances (which could include selling off BuyBuy Baby), fix its supply chain issues and reevaluate its value proposition to customers.
“They really need to figure out how to drive customers into their doors and onto their website and convert that traffic into sales,” Basham said. “Their value proposition needs to improve.”
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, Saunders said, noting that Tritton contrastly was very focused on the brand at a time when its operations really needed to be brought back up to scratch.
“There's always hope for businesses,” he said. “But I don't think there's that much hope for Bed Bath & Beyond unless they pull some real rabbits out of the hat.”
Editor's note: This story has been updated to include information on the retailer's rating at S&P Global Ratings.