Bed Bath & Beyond sees Q2 sales falling 20% amid debt struggles

A mountain of debt and strained relationships with merchandise providers could cripple Bed Bath & Beyond's attempt to bounce back. Therefore Debt is expected to be in focus when the struggling retail company Bed Bath & Beyond [BBBY] reports its second-quarter earnings on Thursday 29 September.

At the end of August, the retailer announced a turnaround plan that included a $375m loan from Sixth Street Partners to boost its cash levels and pare down some of its existing debt. It also announced that it would be closing 150 “lower producing” stores in order to optimise its brick-and-mortar footprint and cut costs.

This has thrown more cold water on a meme stock rally instigated by Reddit traders just a couple of weeks earlier. News that GameStop‘s [GME] chairman had a stake in Bed Bath & Beyond, which included January 2023-dated call options with strike prices between $60 and $80, sent the stock from a 52-week low of $4.38 on 1 July to as high as $30 during intraday trading on 17 August. But when a regulatory filing on 18 August showed Cohen’s RC Ventures had exited its stake, the Bed Bath & Beyond share price pulled back dramatically. It closed on 26 September at $6.37, down 56.3% year to date.

“The shares have stabilised somewhat since the volatility in August, however, the strategic update announced at the end of August doesnt appear to have restored confidence in the outlook for the business,” said chief market analyst Michael Hewson.

Q2 sales to show no sign of turnaround Q2 sales to show no sign of turnaround

Considering the recent analysis, Investors hoping that Bed Bath & Beyond stock can show signs of a turnaround when it reports Q2 earnings are likely to be left disappointed.

At the end of June, Mark Tritton was ousted as CEO following a dismal Q1. Board member Sue Grove was appointed his interim replacement, and is expected to stay in the role for 12 months.

In the three months to 28 May, the company reported a sales drop of 25% to $1.46bn. Net loss was an eye-watering $358m, versus a $51m net loss in Q1 2021. Adjusted loss per share was $2.83, significantly wider than the loss of $1.39 per share that analysts polled by FactSet had been expecting.

The observed poor performance was put down to a combination of “steep inflation and fluctuations in purchasing patterns leading to a significant dislocation in our sales and inventory”.

“The simple reality though is that our first-quarter results are not up to our expectations, nor are they reflective of the companys true potential,” Grove said in a statement.

The company is actively trying to improve the situation, but is expecting second-quarter sales to be down 20% year-on-year. According to Zacks, the consensus among analysts is for revenue to fall 27% to $1.4bn. Earnings are estimated to come in at a loss of $1.59 per share versus a marginal $0.04 per share profit in Q2 2021.

Bankruptcy risks remain

Bankruptcy risk, or insolvency risk, is the likelihood that a company will be unable to meet its debt obligations. It is the probability of a firm becoming insolvent due to its inability to service its debt. Bed Bath & Beyond is optimistic that sales will improve sequentially in the second half of fiscal 2022, as it looks to optimise its inventory.

Based on the announcements made in August regarding The financial package announced pulled the company back from the brink of bankruptcy. However, analysis by CNBC reporters have argued that the company is having problems with suppliers. If big-ticket items are missing from shelves this holiday season, then it would dent its sales further and potentially push it closer to the edge again.

Telsey Advisory Group analyst Cristina Fernandez told Reuters that the company is in a precarious situation, not helped by the fact that a permanent CEO isnt in place. A “gap in senior leadership makes it harder to remain focused on execution”, even more so since the death of former CFO Gustavo Arnal at the start of the month.

Market observation from the analysts shown that they are overwhelmingly bearish on Bed Bath & Beyond‘s share price, with the stock having received a spate of downgrades over the past couple of months, MarketBeat data shows. It has 13 ’sell‘ ratings and one ’hold rating in total. The consensus price target of $6.50 implies an upside of just 2% from its 26 September closing price.