Bed, Bath and Beyond Case Analysis
Study BBBY’s historical results in the “Historical Performance” worksheet contained in the “BBBY” EXCEL workbook. What overall conclusion about BBBY’s recent operating and financial condition do the numbers support? Back up your conclusion by listing the six most critical observations you discern from your analysis of the numbers.
BBBY is a home goods industry leader in sales growth, margins and return on equity. The company continues to generate excess cash through profitable operations despite large capital expenditures for growth. The company needs to create a plan to invest their excess cash to optimize company results and increase shareholder value.
Return on Equity (ROE) is very strong at 49.9% which is entirely attributable to their Return on Invested Capital (ROIC). Since BBBY has not financed the business with any debt, the ROIC equals ROE. However, these returns are negatively impacted by the large balance of non-operating assets (i.e. marketable securities) because they are not offset against any non-operating liabilities. The combination of Return on Net Operating Assets (RNOA) with negative financial leverage and the spread has resulted in lower ROE.
BBBY has $400M excess of Cash and Marketable Securities than needed for planned growth and operations. Holding excess cash during periods of declining interest rates will have a negative impact on returns.
BBBY has created profitable strategies that result in high Profit Margins: * Decentralized product mix decisions to store leaders to carry profitable, high volume products that local consumer demand. * Private-label items that provided value based goods to consumers with high margins for BBBY. * Everyday low pricing strategy with markdowns only for excess inventory of discontinued items * Cost conscious culture that resembles Walmart
* Low advertising costs; low cost mailers and referrals to generate awareness
Small increases in Net Operating Working Capital change despite large investment in store growth over time. BBBY has been successful in increasing their payment deferral period to offset increases in inventory and other current assets needed for growth.
The firm has steadily increased Free Cash Flows from pure business operations. In the past three years, BBBY has generated significant free cash flows despite large capital expenditures for store expansion.
BBBY has generated significant Market Value Add (MVA) and Economic Value Add (EVA). BBBY appears to be an “industry darling” as evidenced by their performance. Positive press coverage of these results has likely helped fuel the run up in their market price. The increased MVA indicates that shareholders have recognized past operating success and believe that the company has strong growth plans that will continue to add value in the future. A strong EVA metric indicates that the return on invested capital has exceeded the cost of capital.
What might a major recapitalization of BBBY signal to investors?
A leveraged recapitalization could signal both proactive (shareholder value returns) and reactive (takeover mitigation) strategies – * The recapitalization would tell investors that BBBY wants to deliver value to shareholders while continuing to fulfill their commitment to invest in store expansion for future growth. The leveraged firm would provide greater returns to the shareholders by adding the value of the tax shield. Additionally, the company would be taking advantage of current capital market conditions which present attractive debt financing options for strong, well-managed companies. The plan represents a prudent and efficient use of balance sheet capacity that would enable BBBY to continue generating sustainable free cash flow to meet their capital needs and growth objectives. * The recapitalization would tell investors that BBBY is...
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