Bed Bath and Beyond Essay Example
Bed Bath and Beyond Essay Example

Bed Bath and Beyond Essay Example

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  • Pages: 6 (1637 words)
  • Published: June 27, 2018
  • Type: Case Analysis
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In the "BBBY" EXCEL workbook's "Historical Performance" worksheet, the numbers indicate the operating and financial condition of Bed, Bath and Beyond (BBBY). Based on the analysis of these numbers, it can be concluded that BBBY's recent operating and financial condition is supported by the following critical observations:

  • 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.
  • The six most critical observations about BBBY's operating and financial condition.
  • The analysis is based on historical results.

Conclusion: BBBY is a leader in the home goods industry, excelling in sales growth, margins, and return on equity. Despite significant capital expendit


ures for growth, the company consistently generates excess cash through profitable operations. To further enhance company results and increase shareholder value, it is necessary for the company to establish a plan for investing its surplus cash.

  1. Observation: The company's return on equity (ROE) is exceptionally strong at 49.9%, which can be attributed solely to its return on invested capital (ROIC). As BBBY has not used any debt to finance its business, the ROIC is equal to the ROE. Nevertheless, these impressive returns are diminished by the substantial balance of non-operating assets.

BBBY has a surplus of $400M in Cash and Marketable Securities, which exceeds the amount needed for planned growth and operations. However, holding excess cash during declining interest rates will negatively impact returns. Additionally, BBBY has implemented profitable strategies that contribute to high Profit Margins. These strategies include decentralized product mix decisions, offering private-label item

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with high margins, maintaining an everyday low pricing strategy, fostering a cost-conscious culture similar to Walmart, and utilizing low-cost advertising methods. Despite making significant investments in store growth, BBBY has managed to only experience small increases in Net Operating Working Capital. This success can be attributed to the company's ability to increase its payment deferral period and offset the rise in inventory and other current assets required for growth.

The firm has consistently grown Free Cash Flows through business operations. In the last three years, BBBY has generated substantial free cash flows despite investing heavily in store expansion. 6. BBBY has also achieved significant Market Value Add (MVA) and Economic Value Add (EVA). Their performance shows that BBBY is considered an "industry darling." The positive press coverage of these achievements has likely contributed to the increase in their market price.

The increased MVA suggests that shareholders have acknowledged the company's past success and have confidence in its future growth plans. Furthermore, a favorable EVA metric indicates that the return on invested capital has surpassed the cost of capital. In terms of investor implications, a significant recapitalization of BBBY could denote both proactive (enhancing shareholder value) and reactive (defense against takeover) strategies. The recapitalization would convey to investors that BBBY aims to generate value for shareholders while still investing in store expansion for future growth. By leveraging the firm, shareholders would experience higher returns through the utilization of tax shields. Moreover, BBBY would be leveraging current capital market conditions to access favorable debt financing options, benefiting from being a strong and well-managed company.

The plan demonstrates a wise and effective utilization of the balance sheet capacity. It allows BBBY

to sustainably generate free cash flow to meet its capital needs and growth objectives. The recapitalization reflects BBBY's concern about hostile takeovers, leading them to increase debt and eliminate excess cash. This approach also gives larger shareholders greater ownership and control. These adjustments make takeovers less appealing and challenging for potential buyers. Regardless of the chosen strategy, the increased debt serves as motivation for management to enhance operational performance and generate enough cash flow to meet their new obligations.

  • To complete the "Unfinished Recap Effects" worksheet, apply the M;M's financial structure model (VL = VU + TC X VIBD – TC X VMS). Submit the completed worksheet and use the results to compare how BBBY's $1.3 billion debt issuance combined with a $0.701 billion liquidation of marketable securities would impact common shares outstanding. Additionally, analyze how a one-time dividend of $1.731 billion or a repurchase of $1.731 billion worth of shares would affect these items. Total capital remains the same in both scenarios, but repurchasing $1.731 billion of shares reduces common shares outstanding to 252.845 and raises the price per share.

However, the book value per share was reduced to $1.02 due to a lower number of shares and lower common stock equity in the share repurchase option. In contrast, for a one-time dividend scenario, the book value per share decreased to $0.87 despite the total number of shares remaining constant and common stock equity being reduced.

The total capital remained unchanged in both situations. However, one scenario involved repurchasing shares worth $1.731B, leading to a reduction in common shares and an increase in share price from $37 to

$39.33. On the other hand, the other scenario entailed distributing a one-time dividend that maintained the total number of shares but caused a decrease in share price to $33.50. To achieve a successful recapitalization, the sum of the dividend and post-recapitalization share value must surpass the pre-recapitalization share price.

Both scenarios had identical book value and market value leverage because the interest-bearing debt and total capital had equal values.

Regarding shareholder wealth: While the absolute shareholder wealth remained unchanged in both scenarios, the repurchase option led to higher shareholder wealth per share as BBBY had a lower number of outstanding shares. Additionally, the repurchase option resulted in changes to voting control by reducing control from "Others" but increasing control for Officers and Directors, Prudential, and AXA Financial.

This presents a potential risk as it may give Prudential or AXA Financial more influence to change the board of directors. However, the voting control remains unchanged for a one-time dividend option. The following are some qualitative risk factors that a potential creditor may consider in assessing BBBY's overall business risk. Please provide your input for the business risk factor related to brand name and market position.

  • Low Risk
  • Moderate Risk
  • High Risk

Despite only holding a 4% market share, BBBY was the largest big-box domestics retailer.

Consumers were pleased with the exceptional customer experience, while analysts admired the consistent growth in sales and earnings.

  • Business Model
  • Low Risk
  • Moderate Risk
  • High Risk

The company effectively coordinated aggressive strategies to expand and increase same-store sales. Its impressive track record in

executing expansion plans enhances the likelihood of success. The business follows a cyclical pattern.

  • Low Risk
  • Moderate Risk
  • High Risk

Sales peak in August, November, and December, while they are lowest in February and March. However, compared to competitors, this business experiences less distinct seasonality. Cash flows during Q1 may pose higher risks.

Product diversification

  • Low Risk
  • Moderate Risk
  • High Risk

The company's wide range of products (30K SKUs) mainly focused on domestics and home furnishings. However, changes in the market for new home sales, weddings, college enrollment, and the overall economy may affect future growth.

Geographical diversification

  • Low Risk
  • Moderate Risk
  • High Risk

The company has a decentralized presence with 629 stores located in suburban areas of medium to large cities. Both new and existing markets will contribute to future growth. The company's extensive store network helps minimize disruptions in specific locations.

Tangible assets available for loan security:

  • Low Risk
  • Moderate Risk
  • High Risk

In addition to cash, a significant portion of BBBY's assets are tied up in inventory and PP;E. While these assets are tangible, they would provide minimal security on loans as their current value is much lower than their selling price. To determine a bond rating for BBBY's $1.731 billion leveraged recapitalizations, we recommend using the information worksheets. It is important to provide a

comprehensive justification for the assigned rating. Based on our assessment, we would assign a bond rating of Aa3 (Moody’s) or AA+ (S&P, Fitch) to reflect the company's strong cash flows and ability to meet its financial obligations.

BBBY has sales and income ratios that are significantly better than industry averages and show high times-earnings-interest ratios. However, our analysis focuses on the high book value debt ratios, which include long-term debt and large operating lease commitments. These debt obligations indicate that BBBY is susceptible to market downturns or other business risks. Nevertheless, this concern is partially mitigated by the lower market value debt ratios, leading our credit analysis to classify BBBY with a strong investment-grade rating. Consider this perspective from a potential creditor.

The text suggests that potential creditors should carefully analyze two projection worksheets to evaluate BBBY's ability to repay its $1.03 billion debt and the associated loan risk. There are four important observations to be made in this regard:

  • Observation:

    BBBY predicts a high likelihood of generating Free Cash Flows, with Cash Flows covering interest and mandatory debt retirement.

Potential creditors would also consider other factors such as BBBY's conservative balance sheet philosophy, absence of long-term debt obligations, strong capital position, negotiation of payment deferral periods to 70 days, and history of timely payments to vendors. These demonstrate BBBY's integrity in meeting future debt obligations.

Additionally, potential creditors would note that BBBY has implemented a successful business model resulting in

double-digit sales growth since 1997. Its leadership team has a solid track record and an effective business plan for the future. Operational risk factors inherent in the company's operations should also be taken into account.

Despite a potential economic downturn, BBBY could lessen the impact by scaling back on investments and sales growth projections while still meeting its debt obligations. However, the availability of collateral for the loan is constrained to inventory and equipment only since BBBY leases its space and does not include account receivable on its books.

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