We are updating our fair value estimate to $0 for no-moat Bed Bath & Beyond BBBY after the company released preliminary third-quarter sales results ahead of its now-postponed earnings filing. Sales of US$1.26 billion were 33% lower than last year, plagued by vendors limiting inventory to the retailer given its cash flow uncertainty. The continued deceleration of sales places Bed Bath on track to generate around US$5 billion in sales this fiscal year (ending February), lower than our US$6 billion forecast.
But weak sales were the least concerning part of Bed Bath’s update. First, the company noted there would be a delay to filing its third-quarter results, which were slated for release on Tuesday, Jan. 10. Also, the company failed to complete its debt exchange offering, the tender period, which expired Jan. 4, indicating the unwillingness of lenders to swap priority position on the balance sheet for a subordinated position given the precarious cash flow generation of the business. Given that we previously didn’t expect Bed Bath to generate enough operating income to cover interest expense until 2025, a further delay places serious concern around the firm’s ability to service its debt or refinance the US$300 million due in 2024 as lenders are more likely to wind down exposure to the name, rather than accommodate the failing business. In this vein was the recognition that there was “substantial doubt about the company’s ability to continue as a going concern.” This indicates potential bankruptcy is a much nearer-term risk than we previously anticipated. Our valuation goes to zero primarily through three channels. Lower sales in 2022 reduces our US$7.60 fair value estimate by US$2. Further sales reductions in our outlook (including another 20% decline in 2023) reduces the value by another US$2. Significantly more stringent payable terms perpetually take another US$2 off. The continued elevation of selling, general, and administrative costs eliminates the remaining value.
