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Bed Bath & Beyond: Branded Assortment Key to Strategic Turnaround Plan

RJ Hottovy
Sep 2, 2022
Bed Bath & Beyond: Branded Assortment Key to Strategic Turnaround Plan

Key Bed Bath & Beyond Metrics

Bed Bath & Beyond announced a wide-ranging "back-to-basics" strategic plan this week designed to improve its financial stability through new financings, reduced cost structure (including closing at least 150 underperforming stores and reviewing its lease portfolio), rebalanced merchandise assortment (including strengthening key vendor relationships), and an elevated customer experience. The company also announced that, after completing a strategic review of the buybuy Baby banner, it plans to keep it as a part of the company and will focus on digital/registry enhancements as well as additional age groups and services to unlock value (in lieu of a sale of the brand). Taken together, these initiatives could offer the blueprint for an impressive turnaround story, but ultimately success will depend on organizational execution (which itself will depend on the new appointment of a CEO, where the company is in the earliest phase of the search process in conjunction with Russell Reynolds). On the heels of this announcement, we thought we’d provide a look at where Bed Bath & Beyond stands as it embarks on its turnaround efforts.

  • Modest improvement in relative visitation trends in August 2022. We’ve recently discussed the mixed signals across the home furnishings retail category, as several retailers like Wayfair calling out macro pressures for recent sales weakness but other players like Arhaus seeing strong visitation growth amid strategic pricing decisions, targeted marketing, site selection, and store personnel investments. Based on the challenges the company has highlighted this year and management’s expectations for a 26% decline in comparable-store sales for 2Q22 – including both in-store (60% of total sales) and digital sales (40%) – it’s not surprising that Bed Bath & Beyond has lagged visitation trends across the home furnishing category (below). With the retailer posting a mid-20s decline in 1H22, it will need to post mid-teens declines in comparable sales for the remainder of the year to achieve its full-year outlook calling for a -20% decrease. Inflation/pricing will likely drive some of this implied comparable-store sales improvement during 2H22, but it’s also encouraging that we’ve started to see Bed Bath & Beyond modestly closing the visitation gap between its stores and the home furnishing category (as shown below, Bed Bath & Beyond had lagged YoY category visit trends by a low-double-digit clip from January through July; during August, this underperformance improved to the high-single-digits).

  • Changes to branded assortment strategy are key to improving visit trends. Among the strategic initiatives that Bed Bath & Beyond announced with the highest potential to immediately improve visitation trends is the decision to rebalance its product assortment by increasing the penetration of several national brands (including Calphalon, UGG, Cuisinart, Dyson, OXO, KitchenAid, Nespresso, and others) while de-emphasizing its private label/owned brands. Over "the next several quarters", the company plans to implement a 3-pronged approach to liquidating excess product, including additional promotion/clearance activity, using third-party sellers and stores that are closing to push through inventory, and canceling orders, with the ultimate goal of reducing its private label penetration by 20% in favor of national brands. Interim CEO Sue Gove pointed out that, "rebalancing [Bed Bath & Beyond’s] inventory will not occur overnight, we are impacting as many of our buys as possible to increase our current national brand inventory and anticipate sequential improvement each quarter as we continue to increase our national brand inventory and reach the appropriate penetration levels".
  • Cost cutting and capital preservation should enable accelerated technology/services investments. As part of its strategic plan, Bed Bath & Beyond management outlined a plan to "right-size" its cost structure, including the closing of 150 lower-performing locations, evaluating the leases for its existing store portfolio, reduced private label product development and support, and a 20% reduction in corporate and supply chain headcount. These initiatives are expected to reduce selling, general, and administrative (SG&A) costs by $250M this year. The company has also announced plans to reduced planned capital expenditures this year to $250M, down from its initial plans of $400M. The company will pause new store opening and remodel activity–recall that we previously noted that Bed Bath & Beyond’s remodeled stores were outperforming the rest of the system but also still lagging the performance of the category–and instead focus its capital expenditures on "technology, capabilities, services, and store maintenance".
  • New funding adds stability. As part of its strategic plan, the company announced that it had secured an additional $500M in new funding, including a $125K expansion of its previous $1B asset-backed revolving credit facility and a new $375 million "first-in-last-out" (FILO) facility. This capital will be used for "immediate" priorities including the aforementioned product inventory assortment adjustments and vendor support. The company has also filed registration statements to issue up to 12M common shares, which will provide the retailer with additional capital for strategic investments or reducing its leverage. Following expanded asset-backed revolving credit facility expansion and the FILO facility – which were completed on September 1 – the company will have $1B in available capital (below).

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RJ Hottovy

Head of Analytical Research, Placer.ai

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for nearly 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank.

R.J. also brings a wealth of experience with early-stage investments as an investment committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he has advised over 50 foodservice and foodservice tech companies on more than $200 million in early-stage capital raises and M&A transactions.

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