‘Trying to put a Band-Aid over a hemorrhaging wound’: Why Bed Bath & Beyond’s downfall is years in the making

The announcement arrives after years of net losses, new merchandising strategies and cuts to operations. Former CEO Mark Tritton, brought in from Target in late 2019 following a takeover attempt by activist investors, put forward a turnaround effort centered on private label launches and retooled store layouts. But those plans, compounded by the pandemic’s shutdowns and supply chain disruptions, failed to turn sales in the right direction. The late summer of 2022 saw Tritton’s exit, staff cuts and store closures, as well as the sudden death of CFO Gustavo Arnal. Then in October, ratings agency Moody’s downgraded it to Caa2, just several steps from the bottom, citing a “high likelihood of default over the next 12 months.”

Net losses in fiscal 2021 came in at $559.6 million, more than double the $150.8 million net loss reported in fiscal year 2020. The company also reported nearly $1.2 billion in long-term debt. By the second quarter of 2022, reported in September, the company reported drop of 28% in net sales year-over-year, and a negative free cash flow of $320.5 million.

The Jan. 5  statement said the company, which also owns buybuy Baby and Harmon Face Values, continues to struggle with inventory — and its ability to catch up is stifled by reduced credit limits. Still, CEO Sue Gove — who joined the company as a director in 2019 and was appointed CEO in October — said Bed, Bath & Beyond remains focused on transforming the organization and building progress quarter by quarter.

“We continue to manage our financial position amidst a changing landscape and work with expert advisors as we consider all paths and strategic alternatives to accomplish our short- and long-term goals,” CEO Sue Gove’s statement said.

Yet it remains unclear what exact steps the retailer can take to rescue its financials.

Doug Stephens, a retail industry consultant, said companies can suffer from “near-termism,” or failure to anticipate future conditions. Though Bed Bath & Beyond was successful as a big box specialty retailer, the advent of e-commerce and online marketplaces meant its value proposition dropped, Stephens said.

This meant increased competition from Amazon, Target and other marketplaces that sell housewares without having to stock the inventory themselves. Though it reported 37% of sales occurring online, Bed Bath & Beyond said in its latest annual report that its competitors include those who “are larger than us with significantly greater financial resources.”

“If Bed Bath & Beyond was going to survive, they needed to do something probably 10 years ago, to put themselves on a new trajectory toward a new model that would give consumers a sense of unique value,” he said. “But they didn’t.” 

Attempts to drive traffic

Efforts to revive the company went into full force in 2019 amid declining sales. The 2018 fiscal year ended with net sales dropping 2.6% year over year, and a net loss of $137 million. In turn, Bed Bath & Beyond looked to drive customers back in store, putting $400 million in remodeling and tech upgrades. It planned to cut inventory and simplify pricing, including relying less on its ubiquitous coupons to drive sales.

Another key part of turnaround plan was investing in private labels. It planned to launch 10 new brands from late 2020 through the following year — those included linens brand Nestwell, bathroom accessories line Haven and boho-aesthetic bed and bath line Wild Sage.

But the pandemic’s interruption to the supply chain damaged the rollout, hurting already-declining sales, said Brad Jashinsky, director analyst for Gartner. This led to inventory issues, with longer lead times for products amid a diminishing cash flow.

“Vendors they previously worked with prioritized other retailers and they were not able to supply enough private label brands with customer appeal,” Jashinksky said.

Bryan Gildenberg, retail consult and CEO of Confluencer Commerce, said the private label strategy was hampered by the promotional environment that many customers associated with Bed Bath & Beyond.

“What people want to Bed Bath & Beyond for, in the end, was promotional pricing,” he said. “Fifty percent off of something that isn’t sold anywhere else doesn’t come in at the same value proposition as 50% off of something else that you know what the price is.”

Missed opportunities for reinvention

Jashinsky from Gartner said Bed Bath & Beyond also struggled to draw shoppers in recent years due to increased competition.

“Competition from Amazon, Target, IKEA, Walmart and other specialty retailers like The Container Store, were able to quickly adapt to consumer demand and supply chain upheavals,” he said.

Still, the company attempted to rally. And in November 2021, the company announced plans to complete a $1 billion share buyback, a decision that hinged on the success of the turnaround plan.

Tritton left the CEO role in the summer of 2022 as net sales dropped to $1.5 billion, and Gove stepped in.

Then in late August 2022, another turnaround attempt began, including identifying 150 retail stores to shut down. It planned job cuts, shuffled its leadership and reduced capital expenditures from $400 million to $250 million. It also discontinued some of its new private labels, and looked to refocus on national brands.

Retail consultant Stephens said such options were too little too late. Providing value to customers could have looked like becoming an “entertaining” in-store experience, or changing up its product assortment. It also could’ve become a destination for DIY advice.

“We’ve come to a point where certain retailers have had to reinvent a level of radical value that they deliver to consumers,” Stephens said. “Bed Bath & Beyond didn’t do it. They just sort of continued to try to put a bandaid over a hemorrhaging wound.”

A greater economic struggle

But timing wasn’t in the brand’s favor as it took these drastic steps. Not only did a plateau of demand for home goods kick in following the boom of lockdown-era sales, but rising inflation dampened the demand for the category.

“It got caught in a terrible environment for discretionary purchases,” Gildenberg said. “As inflation kicked in, certainly in the back half of 2022, shoppers were shifting away from buying things that they wanted, and really refocusing on things that they needed.”

Second-quarter 2022 sales, reported in September, showed a 28% drop in net sales compared to the year prior. At that time, Gove said that “regaining market share and enhancing liquidity are our top priorities.”

But the subsequent quarter doesn’t appear to hold much good news. A third-quarter earnings call has been scheduled for Jan. 10, though Bed Bath & Beyond has submitted a notice of late filing with the SEC. According to the filing, the company anticipates net loss of $385.8 million in the third quarter, compared to $276.4 million a year earlier. Net sales are anticipated to be reported at $1.259 billion, down from $1.878 billion a year ago.

“The expected decline in net sales versus last year is driven by lower customer traffic and reduced levels of inventory availability, among other factors,” the filing said.

Future recovery

The company also made an unsuccessful attempt to gain cash flow with an exchange offer for its unsecured senior notes expiring on Jan. 4.

But it’s unclear what financial steps could be taken at this point to solve the company’s cash flow problems. A statement sent to Modern Retail on Friday said while “no determination has been made,” the company would examine ” seeking additional debt or equity capital, reducing or delaying the company’s business activities and strategic initiatives, or selling assets, other strategic transactions and/or other measures.”

Looking at the credit markets, it’s likely going to be difficult for Bed Bath & Beyond to get the refinancing it needs to get back on track, Jashinksly said. “This is going to cause further inventory issues as vendors will not be willing to supply products to a retailer that may not be able to pay on time for goods,” he said.

Acquisition, sometimes an option for struggling retailers that can be appealing due to real estate assets, is unlikely in the current environment, Gildenberg said. The big-box enclosures of 20,000 to 30,000 square feet that house Bed, Bath & Beyond doesn’t have much appeal in the marketplace, Gildenberg said. The spaces are “too big for a Dollar Tree,” but too small for a Target or Best Buy.

Pier 1, which filed for bankruptcy in early 2020 and shuttered for good in 2022, had a similar fate, Gildenberg said.

“I just don’t think there’s an enormous appetite in the capital markets for a large brick and mortar retailer to buy another one,” he said.

As for bankruptcy options that may be on the table, it’s difficult for retailers to come out successfully, Gildenberg said. Doing so requires significant operational changes like cutting stores and staff while becoming more promotional, which may not work for a brand that’s already implemented such measures.

“It’s a very difficult cycle to break out of,” he said. “There are very few retailers that have gone through Chapter 11 and come out the other side as a rampaging success.”