Bed Bath & Beyond shares plummet after company warns of potential bankruptcy

Bed Bath & Beyond shares plummet after company warns of potential bankruptcy

PUBLISHED THU, JAN 5 

KEY POINTS

• Bed Bath & Beyond warned Thursday it’s running out of cash and is considering bankruptcy.
• The embattled home goods retailer is having trouble getting enough merchandise to fill its shelves and is drawing fewer customers to its stores and website.
• It anticipates a net loss of about $385.8 million for the third quarter, a nearly 40% jump in losses year over year.

In this article, Bed Bath & Beyond warned Thursday it’s running out of cash and is considering bankruptcy.

The retailer, citing worse-than-expected sales, issued a “going concern” warning that in the upcoming months it likely will not have the cash to cover expenses, such as lease agreements or payments to suppliers. Bed Bath said it is exploring financial options, such as restructuring, seeking additional capital or selling assets, in addition to a potential bankruptcy.

Shares of the company fell about 30% to close the day at $1.69 after Bed Bath issued the updates in a pair of financial filings. The stock earlier touched a 52-week low earlier in the day. Its market value has fallen to about $149 million as of Thursday’s close.

Still, CEO Sue Gove said the retailer is focused on rebuilding the business and making sure its brands, Bed Bath & Beyond, Buybuy Baby and Harmon, “remain destinations of choice for customers well into the future.”

Among its challenges, Bed Bath said it is having trouble getting enough merchandise to fill its shelves and is drawing fewer customers to its stores and website.

The retailer also said it wasn’t able to refinance a portion of its debt, less than a month after notifying investors it planned to borrow more in order to pay off chunks of existing obligations.

Bed Bath’s debt load has been weighing on the company. The retailer has nearly $1.2 billion in unsecured notes, which have maturity dates spread across 2024, 2034 and 2044. In recent quarters, Bed Bath has warned it’s been quickly burning through cash.

Bed Bath’s notes have all been trading below par, a sign of financial distress. 

Stalled turnaround

Bed Bath has been through an especially tumultuous stretch, with the departure of its CEO and other top executives, companywide layoffs, store closures and an overhaul of its merchandise strategy. As sales declined, its CEO Mark Tritton got pushed out in June. Gove, who stepped in as interim CEO, has assumed the role permanently.

She laid out a comeback strategy in late August. As part of the plan, she said the company would cut costs by shrinking its store footprint and workforce. Gove said it would add back more items from popular national brands, as it shifted away from an aggressive private label strategy. And she said it had secured more than $500 million in new financing to help steady the business.

The company said during its last earnings report it believed it had enough liquidity to forge ahead.

In a news release Thursday, Gove said recent sales results illustrate why that turnaround plan is so important.

“Transforming an organization of our size and scale requires time, and we anticipate that each coming quarter will build on our progress,” she said.

The company is also looking for a chief financial officer after executive Gustavo Arnal died by suicide in September.

Mounting losses

So far, Bed Bath has not seen its sales trends change. Net sales in the fiscal third quarter, which ended Nov. 26, are expected to be about $1.26 billion — a sharp drop from $1.88 billion in the year-ago period, the company said.

It anticipates a net loss of about $385.8 million for the third quarter, a nearly 40% jump in losses year over year. The quarterly losses include an approximately $100 million impairment charge, which was not specified.

The company is scheduled to deliver full quarterly results and hold an earnings call on Tuesday.

Signs of Bed Bath’s financial stress have shown up on store shelves, too. As the retailer’s cash hoards dwindle, some suppliers aren’t willing to ship large quantities of merchandise — or in some cases, any merchandise — to the company.

Gove said in a news release that reduced credit limits mean customers are seeing emptier shelves and less variety than they expect. She said the company is using the money it’s made over the holiday season to pay vendors and order more inventory.

“We have seen trends improve when in-stock levels have increased,” she said.

Bed Bath already has a history of strained relationships with key national brands, such as Dyson, Keurig and Cuisinart. During previous holiday seasons, Bed Bath didn’t have popular gift items, such as KitchenAid’s stand mixers. Meanwhile, those items were plentiful at competitors like Target.

https://www.cnbc.com/2023/01/05/bed-bath-beyond-shares-plummet-as-company-warns-of-deeper-financial-troubles.html  (video link)

Glossary:  

Bankruptcy—a legal state wherein a debtor (borrower) is temporarily protected from creditors (lenders); under Chapter 11 of the federal bankruptcy code, companies may continue to operate 

Chapter 11—a section of the federal bankruptcy code whereby a debtor is reorganized as a going concern rather than liquidated (see bankruptcy) 

Commercial paper—short-term loans from institutional investors to businesses 

Default—the status of a company that fails to make an interest or principal payment on a debt security on the required date 

Exchange offer—an offer made by a company to its security holders to exchange new, less-onerous securities for those outstanding 

Financial distress—the condition of a business experiencing a shortfall of cash to meet operating needs and scheduled debt-service requirements 

Hold-up value— benefits accruing to participants in a class of securities who are able to extract considerable nuisance value from the holders of other classes of securities 

Par—the face amount of a bond; the contractual amount of the bondholder’s claim 

Recapitalization—financial restructuring of a company whereby the company borrows against its assets and distributes the proceeds to shareholders 

Secured debt—debt backed by a security interest in specific assets 

Senior-debt security—security with the highest priority in the hierarchy of a company’s capital structure 

Shareholder’s (owner’s) equity—the residual after liabilities are subtracted from assets 

Subordinated-debt security - security with a secondary priority in the hierarchy of a company’s capital structure 

Working capital—current assets minus current liabilities 

Understanding financially distressed and bankrupt companies.

Financially distressed and bankrupt securities are analytically complex and often illiquid.

The reorganization process is both tedious and highly uncertain. 

Although the number of variables is high in any type of investing, the issues that must be considered when investing in the securities of financially distressed or bankrupt companies are greater in number and in complexity. 

In addition to comparing price to value as one would for any investment, investors in financially distressed securities must consider, among other things, 

• - the effect of financial distress on business results; 
• - the availability of cash to meet upcoming debt-service requirements; and 
• - likely restructuring alternatives, including a detailed understanding of the different classes of securities and financial claims outstanding and who owns them. 

Similarly, investors in bankrupt securities must develop a thorough understanding of the 

• -  reorganization process in general as well as 
• -  the specifics of each situation being analyzed.

Financially Distressed and Bankrupt Businesses

Companies get into financial trouble for at least one of three reasons: 

• - operating problems, 
• - legal problems, and/or 
• - financial problems. 

A serious business deterioration can cause continuing operating losses and ultimately financial distress.

Unusually severe legal problems caused tremendous financial uncertainty for these companies, leading them ultimately to seek bankruptcy court protection. 

Financial distress sometimes results almost entirely from the burdens of excessive debt; many of the junk-bond issuers of the 1980s shared this experience.

Financial distress is typically characterized by a shortfall of cash to meet operating needs and scheduled debt-service obligations. 

• -  When a company runs short of cash, its near-term liabilities, such as commercial paper or bank debt, may not be refinanceable at maturity. 
• -  Suppliers, fearing that they may not be paid, curtail or cease shipments or demand cash on delivery, exacerbating the debtor’s woes. 
• -  Customers dependent on an ongoing business relationship may stop buying. 
• -  Employees may abandon ship for more secure or less stressful jobs.

Effect of financial distress vary from company to company

Since the effect of financial distress on business results can vary from company to company, investors must exercise considerable caution in analyzing distressed securities. 

The operations of 

• capital-intensive businesses are, over the long run, relatively immune from financial distress, while 
• those that depend on public trust, like financial institutions, or on image, like retailers, may be damaged irreversibly. 

For some businesses the decline in operating results is limited to the period of financial distress. 

• -  After a successful exchange offer, an injection of fresh capital, or a bankruptcy reorganization, these businesses recover to their historic levels of profitability. 
• -  Others, however, remain shadows of their former selves.  

The capital structure of a business also affects the degree to which operations are impacted by financial distress. 

• -  For debtors with most or all of their obligations at a holding company one or more levels removed from the company’s primary assets, the impact of financial distress can be minimal. Overleveraged holding companies, for example, can file for bankruptcy protection while their viable subsidiaries continue to operate unimpaired; Texaco entered bankruptcy while most of its subsidiaries did not file for court protection. 
• -  Companies that incur debt at the operating-subsidiary level may face greater dislocations.

More often bankrupt enterprise continues in business under protection for some to return to financial health

The popular media image of a bankrupt company is a rusting hulk of a factory viewed from beyond a padlocked gate. Although this is sometimes the unfortunate reality, far more often the bankrupt enterprise continues in business under court protection from its creditors. 

Indeed, while there may be a need to rebuild damaged relationships, a company that files for bankruptcy has usually reached rock bottom and in many cases soon begins to recover. 

• -  As soon as new lenders can be assured of their senior creditor position, debtor-in-possession financing becomes available, providing cash to meet payroll, to restock depleted inventories, and to give confidence both to customers and suppliers. 
• - Since postpetition suppliers to the debtor have a senior claim to unsecured prepetition creditors, most suppliers renew shipments. 
• -  As restocked inventories and increased confidence stimulate business and as deferred maintenance and delayed capital expenditures are undertaken, results may begin to improve. 
• - Cash usually starts to build (for a number of reasons). 
• -  When necessary, new management can be attracted by the prospect of a stable and improving business situation and by the lure of low-priced stock or options in the reorganized company. 

While Chapter 11 is not a panacea, bankruptcy can provide a sheltered opportunity for some troubled businesses to return to financial health.

Extinct Companies: Some die young, some in middle age. Bankruptcies and Takeovers

Companies die every year. 

Some die young.  They try to go too far too fast on borrowed money they can't pay back, and they crash. 

Some die in middle age because their products turn out to be defective, or too old-fashioned, and people stop buying.  Maybe they're in:

• the wrong business, or
• the right business at the wrong time, or
• worst of all, the wrong business at the wrong time.

Big companies can die right along with smaller and younger companies.

American Cotton, Laclede Gas, American Spirits, Baldwin Locomotive, Victor Talking Machine, and WRight Aeronautical were once big enough and important enough to be included in the Dow Jones Industrial Average, but they're gone now, and who remembers them?  The same goes for Studebaker, Nash, and Hudson Motors, Remington Typewriter, and Central Leather.

Takeover

There's one way a company can cease to exist without actually dying.  It can be swallowed up by some other company in a takeover. 


Bankruptcy:  Chapter 11 protection and Chapter 7

Chapter 11:  And often, a company can avoid dying a quick death by seeking protection in a bankruptcy court. Bankruptcy court is the place where companies go when they can't pay their bills, and they need time to work things out.  So they file for Chapter 11, a form of bankruptcy that allows them to stay in business and gradually pay off their debts.  The court appoints a trustee to oversee this effort and make sure everyone involved is treated fairly.

Chapter 7:  If it's a terminal case and the company has no hope of restoring itself to profitability, it may file for Chapter 7.  That's when the doors are closed, the employees sent home, and the desks, lamps and word processors are carted off to be sold.

Often in these bankruptcies, the various groups that have a stake in the company (workers, vendors, suppliers, investors) fight each other over who gets what. 

• These warring factions hire expensive lawyers to argue their cases. 
• The lawyers are well-paid, but rarely do the creditors get back everything they're owed. 

There are no funerals for bankrupt companies, but there can be a lot of sorrow and grief, especially among workers, who lose their jobs and bondholders and stockholders, who lose money on their investments.

Companies are so important to the health and prosperity of the country that it is too bad there isn't a memorial someplace to the ones that have passed away.  Or perhaps the state historic preservation deparments should put up plaques on the sites where these extinct companies once did business.  There ought to be a book that tells the story of interesting companies that have disappeared from the economic landscape, and describes how they lived, how they died, and how they fit into the evolution of capitalism.

Chrysler driven into bankruptcy

Chrysler driven into bankruptcy

Chrysler became the first major car manufacturer to file for bankruptcy in the current recession after last-minute negotiations between the US government and a batch of dissident hedge fund creditors broke down.

By James Quinn, Wall Street Correspondent
Last Updated: 9:20PM BST 30 Apr 2009

But, at the same time, Chrysler entered into a strategic partnership with Italian rival Fiat designed to safeguard its long-term future and give it access to fuel-efficient technologies and smaller car designs.

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The developments – which followed months of negotiations by Barack Obama’s automotive task force – herald a new chapter in the 84-year-old company’s history. A chapter which will ultimately see it controlled by Fiat and the United Auto Workers (UAW) union.

The collapse followed an 11th-hour stand-off between the US automotive task force and 20 hedge and distressed debt funds which control $1bn (£676m) of Chrysler’s $6.9bn debt. The funds refused to accept a deal which would have seen them paid only 44pc of what they are owed.

The dissident funds, including Oppenheimer Funds and Perella Weinberg’s Xerion Capital Fund, stood firm after alleging they were being unfairly treated in favour of government funded banks such as JP Morgan Chase and Goldman Sachs, who are among Chrysler’s biggest creditors.

President Obama reprimanded the hedge funds, saying he could not support “a group who held out for the prospect of an unjustified taxpayer bailout”. He added that some “demanded returns twice what others were getting”. The attack was a negative moment in an otherwise highly positive statement, in which he called Chrysler one of the companies that “helped make the 20th century the American century”.

The car maker has been given a “new lease on life” as a result of the deal with Fiat, the President said. He added that the company’s move into Chapter 11 will be “quick ... efficient ... and controlled” and “will not disrupt the lives of those who work at Chrysler.”

The alliance with Fiat will safeguard 30,000 jobs at Chrysler, tens of thousands at suppliers and dealers, and guarantee the healthcare rights of 170,000 retired Chrysler workers and their families.

Chrysler was last night due to file for Chapter 11 bankruptcy protection in New York, a process which will allow a bankruptcy judge to approve its restructuring plan, which has the support of employees, unions, and 70pc of creditors by value.

Obama administration officials described the bankruptcy process as “purely surgical”, saying it would take 30-60 days for the new Chrysler to re-emerge.

Filing for bankruptcy will allow Chrysler to access $3.3bn in new debtor-in-possession financing from the US government, intended to ensure it can operate as normal through the process, as well as $4.7bn in US loans on exiting Chapter 11, on top of $4bn already loaned back in December. The Canadian and Ontario governments will provide a further $2.42bn.

In return, on formation of the new Chrysler, the US government will own an 8pc stake — and its Canadian counterparts a 2pc stake — and will be able to nominate five directors between them.
Fiat will get a 20pc stake in the new company to begin with, but President Obama stressed the Italian company will not be allowed to take a majority stake until “every taxpayer dime” has been repaid. UAW, will have a 55pc stake.

http://www.telegraph.co.uk/finance/newsbysector/transport/5252690/Chrysler-driven-into-bankruptcy.html