Bed, Bath and Beyond Case Analysis 1. Study BBBY’s historical results in the “Historical Performance” worksheet contained in the “BBBY” EXCEL workbook. What overall conclusion about BBBY’s recent operating and financial condition do the numbers support? Back up your conclusion by listing the six most critical observations you discern from your analysis of the numbers. Conclusion: BBBY is a home goods industry leader in sales growth, margins and return on equity. The company continues to generate excess cash through profitable operations despite large capital expenditures for growth.
The company needs to create a plan to invest their excess cash to optimize company results and increase shareholder value. Observation#1: Return on Equity (ROE) is very strong at 49. 9% which is entirely attributable to their Return on Invested Capital (ROIC). Since BBBY has not financed the business with any debt, the ROIC equals ROE. However, these returns are negatively impacted by the large balance of non-operating assets (i. e. marketable securities) because they are not offset against any non-operating liabilities.
The combination of Return on Net Operating Assets (RNOA) with negative financial leverage and the spread has resulted in lower ROE. #2: BBBY has $400M excess of Cash and Marketable Securities than needed for planned growth and operations. Holding excess cash during periods of declining interest rates will have a negative impact on returns. #3: BBBY has created profitable strategies that result in high Profit Margins: * Decentralized product mix decisions to store leaders to carry profitable, high volume products that local consumer demand. * Private-label items hat provided value based g...
oods to consumers with high margins for BBBY. * Everyday low pricing strategy with markdowns only for excess inventory of discontinued items * Cost conscious culture that resembles Walmart * Low advertising costs; low cost mailers and referrals to generate awareness #4: Small increases in Net Operating Working Capital change despite large investment in store growth over time. BBBY has been successful in increasing their payment deferral period to offset increases in inventory and other current assets needed for growth. #5: The firm has steadily increased Free Cash Flows from pure business operations.
In the past three years, BBBY has generated significant free cash flows despite large capital expenditures for store expansion. #6: BBBY has generated significant Market Value Add (MVA) and Economic Value Add (EVA). BBBY appears to be an “industry darling” as evidenced by their performance. Positive press coverage of these results has likely helped fuel the run up in their market price. The increased MVA indicates that shareholders have recognized past operating success and believe that the company has strong growth plans that will continue to add value in the future.
A strong EVA metric indicates that the return on invested capital has exceeded the cost of capital. 2. What might a major recapitalization of BBBY signal to investors? A leveraged recapitalization could signal both proactive (shareholder value returns) and reactive (takeover mitigation) strategies – * The recapitalization would tell investors that BBBY wants to deliver value to shareholders while continuing to fulfill their commitment to invest in store expansion for future growth. The leveraged firm would provide greater returns t
the shareholders by adding the value of the tax shield.
Additionally, the company would be taking advantage of current capital market conditions which present attractive debt financing options for strong, well-managed companies. The plan represents a prudent and efficient use of balance sheet capacity that would enable BBBY to continue generating sustainable free cash flow to meet their capital needs and growth objectives. * The recapitalization would tell investors that BBBY is concerned about a hostile takeover so they added debt and eliminated excess cash. This approach also provides higher ownership and share of control to large shareholders.
These changes make takeovers more difficult and less attractive to prospective buyers. Regardless of approach, the large debt could be a strong motivator for management to continue to improve operational performance thus generating sufficient cash flows to pay their new obligations. 3. Assume M&M’s financial structure model (VL = VU + TC X VIBD – TC X VMS) holds and complete the cells that are shaded light grey in the “Unfinished Recap Effects” worksheet. Turn in a copy of your completed worksheet and use the results to compare and contrast how BBBY’s issuance of $1. 3 billion in debt together with liquidating $0. 701 billion in marketable securities in order to pay a one-time dividend of $1. 731 billion or repurchase $1. 731 billion of shares would affect these items: Common shares outstanding Total capital was the same under both scenarios but a repurchase of $1. 731B of shares reduced common shares outstanding to 252. 845 and increased the price per share. However, the one-time dividend kept the total number of shares constant and reduced the price per share. Book value per share
On the share repurchase option, the book value per share was reduced to $1. 02 as a result of a lower number of shares and lower common stock equity. However, the book value per share was reduced to $0. 87 for a one-time dividend scenario because the total number of shares stayed constant and common stock equity was reduced. Common stock price per share Total capital was the same under both scenarios but a repurchase of $1. 731B of shares reduced common shares outstanding and increased the price per share from $37 to $39. 33.
However, the one-time dividend kept the total number of shares constant and reduced the price per share to $33. 50. In a successful recapitalization, the value of the dividend plus the value of the post-recap share should exceed the pre-recap share price. Book value leverage Book value leverage was identical for both scenarios because interest-bearing debt and total capital values are equal. Market value leverage Market value leverage was identical for both scenarios because interest-bearing debt and total capital values are equal. Shareholder wealth
Absolute shareholder wealth is equal under both scenarios. However, shareholder wealth per share is higher for the repurchase option because BBBY has fewer shares outstanding. Voting control Voting control changed for the repurchase option because BBBY bought the shares back from the open market. As a result, it reduced control from “Others” but increased control for Officers and Directors, Prudential and AXA Financial. This could
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