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The Ratings Game: Bed Bath & Beyond bankruptcy warning marks latest chapter in troubled retailer’s downward spiral

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Bed Bath & Beyond’s warning that it may need to declare bankruptcy marks the latest chapter in a downward spiral for the troubled company.

On Thursday Bed Bath & Beyond Inc.
BBBY,
-23.24%

 said it has “substantial doubt” about its “ability to continue as a going concern” and may need to declare bankruptcy. The home goods retailer also said that it expects to record lower sales for the latest quarter than analysts were anticipating.

The announcement, which sent Bed Bath & Beyond’s stock sinking toward a 30-year low, follows a turbulent few years marked by strategic missteps, cash burn, challenging underlying business trends, and the impact of the COVID-19 pandemic.

“I’m not surprised by Bed Bath & Beyond’s announcement and unfortunately, it likely signals a downward spiral,” Carol Spieckerman, president of retail advisory firm Spieckerman Retail, told MarketWatch. “Even though Bed Bath & Beyond toyed with category expansion over the years – everything from gourmet foods to health and beauty – those ‘beyond’ pieces of the business were always on the sidelines. Bed Bath & Beyond, at its heart, is a home goods category-killer.”

See Now: Bed Bath stock plunges after warning that it may need to declare bankruptcy

But being a category killer was a great model until it wasn’t, according to Spieckerman. “High-margin home goods have been in retailers’ sites for several years and only accelerated during the pandemic,” she said. “Amazon
AMZN,
-1.69%
,
Walmart
WMT,
-0.42%
,
Target
TGT,
-0.41%
,
dollar stores, off-price retailers, and even major grocers have been attacking the category with private brand development proliferating as well.”

Category and business model diversification are the growth engines of the future, according to the retail expert, who notes that Bed Bath & Beyond has neither. “Lack of diversification is yet another major obstacle,” she added.

These sentiments were echoed by Wells Fargo analyst Zachary Fadem. “While the writing has been on the wall for some time, we believe this morning’s announcement provides further confirmation that BBBY results are deteriorating quickly and a bankruptcy filing could be imminent,” he wrote, in a note released Thursday. “We view today’s sharply negative reaction as justified,” he added.

Citing remaining downside risk, Wells Fargo reiterated its underweight rating for Bed Bath & Beyond and lowered its price target for the company to $1 from $2.

Bed Bath & Beyond eyes turnaround, but fundamentals and underlying trends remain ‘challenging,’ say analysts

In a statement Bed Bath & Beyond’s CEO Sue Gove said there is a “clear vision” for the future of the company, pointing to its turnaround plan announced last year. “Our plan has two anchors: the first enables us to refocus merchandising and inventory, operate more efficiently, and grow our digital and omni-capabilities, and the second focuses on strengthening our financial position,” she said.

But the outlook for the company is bleak, according to retail expert Neil Saunders, managing director of GlobalData Retail. “Bed Bath & Beyond is too far gone to be saved in its present form and its future options are few and far between,” he tweeted Thursday.

In September the retailer and sometime meme stock darling reported a much wider-than-expected second-quarter loss, which at the time prompted Wells Fargo’s Fadem to describe the company’s results as “indefensible.”

Bed Bath & Beyond also had to contend with leadership change, set against the backdrop of a tough business environment.  In June, Mark Tritton was ousted as Bed Bath & Beyond’s CEO after less than three years in the role. Tritton’s attempts to breathe new life into the ailing company were hampered by supply-chain disruptions, labor shortages, inflation and the COVID-19 pandemic, according to Spieckerman.

Challenges facing ousted Bed Bath & Beyond CEO became ‘quickly insurmountable’: retail expert

“Tritton’s turnaround strategy largely centered on an ambitious plan to build a private brand portfolio and remodel stores to showcase the brands, or at least give them a fighting chance,” she told MarketWatch. “The one-two punch of brand creation and store sprucing made a lot of sense when Tritton took the job in 2019. In a case of horrible timing, the COVID pandemic lurked just around the corner.”

Tritton was hired as CEO in 2019 as Bed Bath & Beyond looked unsuccessfully to replicate the success he’d enjoyed as Target Corp.’s chief merchant. 

“Bed Bath and Beyond was stuck between attempting to be a brand under Tritton’s leadership and returning to just being a place that has brands as Sue Gove’s strategy swung back to courting national brands,” Spieckerman added. “The shift back to national brands is particularly perilous and ill-timed now that Bed Bath & Beyond can’t pay its suppliers.”

Major brands have options given that many retailers have doubled down on home goods so the incentive to take risks with Bed Bath & Beyond is low, according to Spieckerman. “This is particularly true as major retailers cancelled billions of dollars in orders prior to the holidays to remedy inventory pile-ups,” she said, noting that suppliers are quite risk averse going into 2023. “Even if Bed Bath & Beyond were to fill its shelves with well-known brands again, it would be carrying the brands everyone else has.”

Bed Bath & Beyond has also been struck by tragedy. In August 2022 the company’s chief financial officer, Gustavo Arnal, jumped to his death from a New York skyscraper.

See: What can we expect from meme stocks AMC, GameStop and Bed Bath & Beyond in 2023?

The company’s stock has fallen 86.1% in the last 12 months, outpacing the S&P 500 Index’s
SPX,
-1.11%

decline of 18.9%.

Bed Bath & Beyond stock skyrocketed in 2022 but was hit hard in August after activist investor and GameStop Corp. Chairman Ryan Cohen disclosed he is selling a large stake in the company.

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