end of last month Bed Bath & Beyond (BBBY -8.76%) Revealed a new plan to get out of the accelerating downward spiral.

Under interim CEO Sue Gove, the company has slashed costs, reverted its product mix to national brands to win over customers, closed 150 underperforming stores, and closed virtually all long-term stores. Bed Bath & Beyond, meanwhile, has secured $505 million in new debt to strengthen its liquidity.

By preparing new funding and cutting spending to reduce cash burn, management hopes to buy time to turn things around. Unfortunately, even these heroic efforts are unlikely to save the iconic home furnishings retailer.

business is still terrible

Three months ago, Bed Bath & Beyond announced comparable first quarter sales were down 23% year-over-year. This resulted in a net loss of $358 million and cash burns of approximately $500 million each quarter. Management expected similar trends to continue in the second quarter before improving in the second half of 2022.

Bed Bath & Beyond said its comp sales decline accelerated to about 26% from the previous quarter in connection with its strategy update in late August. Cash burn has improved somewhat to about $325 million, which is still very high by objective standards.

Management expects sales trends to improve soon, but not by much. The company is now seeking a decline in comp sales in the “20% range” for the second half of the year. This will almost certainly prevent Bed Bath & Beyond from becoming profitable, despite aggressive cost-cutting plans.

No quick fix available

Focusing on cost savings is the right move for Bed Bath & Beyond as it offers the only plausible way to survive. That said, it will probably turn out to be too little, or too late.

Bed Bath & Beyond, for example, has just completed a two-year program to close 20% of its eponymous stores. These closures have not had a noticeable positive impact on the company’s finances.The decision to close nearly 20% of the remaining Bed Bath & Beyond stores shortly after completing the previous downsizing was It highlights that the shutdown is more a symptom of brand failure than a solution.

The exterior of the Bed Bath & Beyond store.

Image Source: Author.

Moreover, even with significant cost and capital investment reductions, Bed Bath & Beyond’s cash burn will not be completely resolved. After all, the company spent him $325 million last quarter. A $200 million cut in his quarterly spending would give him some leeway, but it wouldn’t make his business sustainable.

Interest expense soars

The majority of Bed Bath & Beyond’s new funding consists of a $375 million term loan with variable interest rates starting at approximately 10%. With the U.S. Federal Reserve (Fed) likely to continue raising rates in the coming months, its rate could approach 12% by mid-2023.

Meanwhile, Bed Bath & Beyond raised $550 million in its revolving credit facility in the first half of fiscal 2022. Interest rates on these loans are much lower (currently around 4%), but interest rates will rise when the Fed raises rates.

In total, Bed Bath & Beyond’s recent borrowings could add approximately $75 million to annual interest expense next year. This complicates the company’s efforts to get back above breakeven.

just desperate play

The only plausible route for Bed Bath & Beyond to return to profitability is through sales recovery. But that is virtually impossible to achieve if home furnishing spending continues to decline.

Unfortunately, inflation remains so high that many consumers are forced to refrain from discretionary shopping. And with the Federal Reserve (Fed) raising interest rates to fight inflation, the economy could slip into recession next year. Considering how much people have invested in furnishing their homes from 2020 to 2021, buying more home-related items probably won’t be a priority in the next few years.

US Consumer Price Index YoY Chart

US Consumer Price Index (YoY), YCharts data.

Even after the capital increase, Bed Bath & Beyond’s liquidity remains at just $1.0 billion, up from $1.4 billion at the beginning of fiscal 2022. The company also plans to sell 12 million of his shares, which would only raise about $100 million at current prices. .

This liquidity cushion will take Bed Bath & Beyond about a year to get sales and earnings back on track. Unless the macroeconomic environment improves dramatically, that alone will not be enough. By late 2023, liquidity will likely drop to critical levels again, and by mid-2024 he will be nearing $300 million in debt maturity, making bankruptcy virtually inevitable.

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