Earlier this month, Bed Bath & Beyond (NASDAQ: BBBY) reported dreadful results for the first quarter of fiscal 2020. Revenue plunged by nearly half due to the COVID-19 pandemic, while gross margin fell to just 26.7%, compared to 34.5% in the prior-year period. As a result, the struggling home-furnishings specialist posted an adjusted loss of $243 million and burned through $437 million of cash last quarter.
While the rest of 2020 probably won't be quite as dismal for Bed Bath & Beyond, the retailer was already grappling with a steady, long-term downtrend in store traffic. New CEO Mark Tritton has some good ideas for how to turn things around, but the pandemic has shortened the company's runway. Fortunately, investors have gotten a few pieces of good news this month with respect to buying time for a turnaround.
A delayed asset sale is going forward
Bed Bath & Beyond announced this week that it had reached a settlement with 1-800-FLOWERS.COM that will allow the planned sale of its PersonalizationMall.com business to be completed.
Bed Bath & Beyond first announced the sale of this non-core business for $252 million in February. When the pandemic hit, 1-800-FLOWERS.COM asked to delay the deal's closing, sparking a legal battle between the two companies. Now, it looks like they're prepared to complete the sale by no later than Aug. 3, albeit at a slightly reduced deal price of $245 million (excluding working capital adjustments).
This asset sale will bolster Bed Bath & Beyond's balance sheet. Despite its Q1 cash burn, the home goods retailer had $1.17 billion of cash and investments on hand at the end of last quarter. An $850 million secured credit facility announced last month will provide additional liquidity for the next few years. Furthermore, the company thinks it could potentially raise another $350 million to $450 million from selling other assets -- most likely the Cost Plus World Market and Christmas Tree Shops chains.
Business trends have improved
Better cash flow will also be critical to Bed Bath & Beyond's long-term survival. It doesn't matter how much capital the company raises if it quickly burns through its cash.
On the company's Q1 earnings call earlier this month, management noted that sales declined just 7% year over year in June, as most stores reopened and online sales remained strong. In a recent investor FAQ document, management noted that cash flow turned positive last month, thanks to stronger sales trends.
Bed Bath & Beyond hopes to drive further earnings improvement by reducing annual costs by $250 million to $350 million. That includes $100 million of annual savings from closing about 200 underperforming stores -- mainly under the Bed Bath & Beyond nameplate -- over the next two years.
There's still trouble ahead
Getting the PersonalizationMall.com asset sale back on track, returning to positive cash flow in June, and implementing cost cuts are all positive for shareholders. However, Bed Bath & Beyond will still face an uphill battle in its attempt to return to sustainable profitability and consistently positive cash flow.
In the short term, with COVID-19 case numbers spiking in many parts of the U.S., the improving business trends that Bed Bath & Beyond experienced last month may not continue this summer. The June sales rebound -- driven by pent-up demand -- could give way to a new slump, hurting cash flow, as well. Furthermore, with fewer college students going away to school this fall, sales of dorm furnishings and other back-to-college items could suffer.
Moreover, Bed Bath & Beyond was barely profitable even before the pandemic. A rapid shift toward e-commerce (a less profitable sales channel, in general) will put further pressure on its earnings. Even if Bed Bath & Beyond's sales fully recover from COVID-19 over the next couple of years, cost cuts might do no more than offset the margin pressure from greater reliance on e-commerce.
Perhaps Tritton and his team will be able to pull a rabbit out of the hat and save Bed Bath & Beyond despite the severe headwinds it faces. I, for one, will watch with interest from the sidelines.
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