Research: Rating Action: Moody’s Downgrades Bed Bath & Beyond’s CFR to Caa2; negative outlook

New York, July 20, 2022 — Moody’s Investors Service (“Moody’s”) has downgraded the Family of Companies (“CFR”) rating of Bed Bath & Beyond Inc. (“Bed Bath”) to Caa2 from B2, its probability of default rating at Caa2-PD from B2-PD and its senior unsecured note rating at Caa3 from B3. The speculative liquidity rating was also lowered to SGL-4 from SGL-2. The outlook changed from stable to negative.
The downward revisions reflect the impact of Bed Bath’s sharp decline in revenue and EBITDA on its liquidity, free cash flow and credit metrics. The challenges Bed Bath faces in restoring profitability are also considered. Inventory levels are not only high and misaligned with sales trends, but are overweight private label products that need to be phased out and replaced with national brands in the face of weaker consumer demand. In addition, the downward revisions reflect governance considerations, including the company’s early departure of its CEO and chief marketing officer, the completion of its $1 billion accelerated share buyback program with $40 million of share buybacks in the first quarter of 2022 despite the company’s weak operational performance and the ineffectiveness of its turnaround strategy to address continued pressures on Bed Bath’s operations and credit metrics.
The downgrade of its speculative liquidity rating to SGL-4 (low liquidity) reflects the reduction in Bed Bath’s cash balances following its share buybacks at a time when free cash flow is expected to be significantly negative over the course of the year. fiscal 2022 due to high working capital utilization and weak operating performance. As a result, Bed Bath will increase its reliance on its $1 billion asset-based revolving credit facility (“ABL”), which will result in limited excess capacity in the coming quarters. The Bed Bath ABL expires in August 2026, but its maturity will revert to May 1, 2024 if more than $50 million of the 2024 notes are still outstanding by that date.
Bed Bath’s credit impact score was lowered to CIS-5 from CIS-3 and governance IPS was lowered to G-5 from G-3, acknowledging Bed’s aggressive share buyback program Bath combined with management’s inability to complete its operational turnaround and effectively manage inventory levels that resulted in low liquidity and very high leverage.
Downgrades:
..Issuer: Bed Bath & Beyond Inc.
…. Business family ranking, downgraded to Caa2 from B2
…. Default scoring probability, downgraded to Caa2-PD from B2-PD
…. Speculative liquidity rating, downgraded to SGL-4 from SGL-2
…. Senior regular unsecured bond/debenture, downgraded to Caa3 (LGD5) from B3 (LGD4)
Outlook Actions:
..Issuer: Bed Bath & Beyond Inc.
…. Outlook, changed to negative from stable
RATINGS RATIONALE
Bed Bath’s Caa2 CFR reflects its low liquidity, very high leverage and the challenges it faces in turning around its operating performance. For the LTM period ended May 28, 2022, debt/EBITDA was 9.7x and EBIT/interest was -1.6x. For the same period, Bed Bath generated free cash flow deficits of $722 million. The company’s operational challenges have steadily accelerated, which have taken a heavy toll on its profitability and liquidity. Interim senior management has hired consultants to support Bed Bath in its operational turnaround efforts, which include inventory, cash management and balance sheet optimization. However, operational performance is expected to weaken further during 2022 as the company must eliminate excess inventory while continuing to deal with supply chain challenges and inflation. Bed Bath’s liquidity is weak as the use of working capital has increased due to longer lead times, higher transit inventory and lower consumer demand which has unbalanced inventory. Nonetheless, the company continues to seek strategic alternatives for its BABY buybuy operations, which have sales of more than $1.4 billion and could be a significant source of additional cash. Bed Bath faces $285 million notes maturing in 2024 and a significant improvement in profitability will be needed to return to a sustainable capital structure.
The negative outlook reflects Moody’s expectation for continued pressure on profitability that reflects the lack of progress in its turnaround efforts as it faces a challenging consumer environment for the household goods category. The outlook also reflects the need to refinance its 2024 maturity, which increases the risk of a distressed market and its need to improve its liquidity profile.
FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS
Ratings could be downgraded to the extent that its operational efforts do not result in consistent short-term operational improvement, if market share erosion is long-lasting, if liquidity deteriorates for any reason, or if the risk of a distressed market or financial restructuring increases.
An upgrade would require the company to maintain adequate liquidity and make meaningful progress on its operating initiatives, resulting in positive free cash flow and market share stabilization while EBIT/interest is maintained above 1.0x.
Based in Union, NJ, Bed Bath & Beyond Inc. is an omnichannel retailer selling a wide assortment of home and home furnishings that operates as Bed Bath & Beyond, Harmon, Harmon Face Values or Face Values, buybuyBABY , and Decorist. LTM revenue for the period ending May 28, 2022 was approximately $7.4 billion.
The main methodology used in these ratings is Retail published in November 2021 and available on https://ratings.moodys.com/api/rmc-documents/356421. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY INFORMATION
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