Bed Bath & Beyond (BBBY, Financial) has finally filed for bankruptcy after a long fight to stave it off, stating that it has made the difficult decision to begin winding down its operations. The annoucement came on April 23.
Bed Bath & Beyond is a retail chain that specializes in home goods, decor, furniture and a wide variety of other home goods. For many of the harder to find home good, Bed Bath was the go-to before e-commerce grew in popularity. The company was founded in 1971 and is headquartered in Union, New Jersey.
In hindsight, it's easy to see why the company went bankrupt. It has faced some financial challenges in recent years, including declining sales and profits. As a result, the company has implemented several strategic initiatives, such as store closures and cost-cutting measures, in an effort to improve its financial performance.
However, there are quite a few companies on the market with financial metrics that look even worse than Bed Bath's on paper, and yet they still manage to function year after year. What made Bed Bath so different? Let's take a closer look at the comopany's situation and its financials to identify the key signs that predicted the bankruptcy.
The fall of a giant
In July 2020, Bed Bath announced that it would be closing approximately 200 stores over the next two years. The company also announced a series of cost-cutting measures, including reducing its corporate workforce and optimizing its supply chain operations.
Additionally, in October 2020, Bed Bath completed the sale of its PersonalizationMall.com business to 1-800-Flowers.com (FLWS, Financial) for $252 million. This sale was part of the company's ongoing efforts to streamline its operations and focus on its core business.
Despite the declining sales that resulted in so many cost-cutting measures, Bed Bath continued to operate its remaining stores and e-commerce website for a while. However, increased competition from online retailers and changing consumer shopping habits continued to bite. In the fiscal year 2020, which ended in February 2021, the company reported net sales of $9.2 billion, a 24% decrease from the previous fiscal year.
The Covid-19 pandemic also had an impact on the company's sales performance, as many of its stores were temporarily closed or had reduced operating hours. The company saw a significant increase in its e-commerce sales during this time, as more consumers shifted to online shopping, but it wasn't enough.
Next, let's take a look at five of the main financial red signals that could have helped predict when Bed Bath's balance sheet finally reached the breaking point.
Red signal 1: Current ratio less than 1.0
The current ratio is a liquidity ratio that is calculated as current assets divided by current liabilities. A company with a current ratio of less than 1.00 means that it does not have the required capital to meet its short-term obligations. According to the lastest earnings results, the company had a current ratio of 0.73.
Red signal 2: Debt-to-equity ratio was negative
For the same quarter mentioned above, the company had a debt-to-equity ratio of -4.55. What this means is that the shareholders’ equity was negative, or in other words, the net worth of the company was also negative. Equity is the balance when subtracting liabilities from assets. Negative equity means the company, if sold, owes more than what it is worth, which is not a good scenario for its shareholders. If shareholders' equity remains negative for a significant amount of time, the company faces a risk of being unable to pay any off its debts even if it finds a buyer to acquire it. The business thus has a high chance of becoming insolvent.
Red signal 3: Negative operating margin
Having a negative operating margin means the company is losing money from the core business operations. Without profits, it is too difficult to survive in the long term. Only growing companies have a chance of continuing operations with negative operating margins as they are receiving more cash injections from investments and funding rounds; a negative operating margin is a much worse red flag for a company that has declining sales. Bed Bath had nine consecutive quarters reporting negative operating margins.
Red signal 4: Vey low inventory turnover ratio
The inventory turnover ratio is calculated by dividing the cost of goods by the average inventory for the same period. A higher ratio indicates strong sales and a lower one weak sales. In general, the higher the ratio, the better. This financial ratio shows how many times a company turns over its inventory relative to its cost of goods sold in each period. A low ratio indicates weak sales and/or excess inventory, and neither of those things is good news. A high ratio reduces the amount of capital a business has tied up in its inventory. Bed Bath has an inventory turnover ratio of 0.65.
Red signal 5: Free cash flow per share is negative
Having a negative free cash flow means a company is burning cash. Free cash flow is the amount of cash generated by a business, after accounting for reinvestment in non-current capital assets by the company. In other words, free cash flow is how much money a business has left over after it has paid for everything it needs to continue operating. Having a negative figure means that it does not have any cash and must continue raising liquidity in order to continue functioning. For a company with long-term declining sales, this is a disaster.
