Bed Bath & Beyond’s impending liquidity crunch and Chapter 11 talk hint at possible 2023 retail bankruptcy wave

Legal Analysis 11 January

Bed Bath & Beyond’s impending liquidity crunch and Chapter 11 talk hint at possible 2023 retail bankruptcy wave

Bed Bath & Beyond Inc—a New Jersey-based retailer of home, baby, beauty, and wellness goods—is reportedly gearing up for a potential Chapter 11 filing in the coming weeks. The company has failed to keep up with the times, struggling to compete with Amazon and other market players alongside a change in consumer behavior that has resulted in repeated declining sales and substantial losses alongside an overleveraged balance sheet.

In this piece, the Debtwire legal analyst team examines Bed Bath & Beyond’s current state of affairs and assesses the company’s outlook and what it could mean for retail in the coming year.

Declining sales and a failed refinancing

In advance of its 3Q22 earnings call, the company disclosed in a press release that net sales in the third fiscal quarter declined approximately 33% to USD 1.26bn from USD 1.88bn just a year prior. The company attributed this decrease, in part, to reduced customer traffic as a result of changes in consumer shopping behavior and difficulties the company has faced in maintaining sufficient inventory. In line with this, the company also reported 3Q22 net losses of approximately USD 393m, which represents a more than USD 110m increase in net losses for the same period from the year before.

The company currently holds approximately USD 200m in cash and cash equivalents on hand and maintains an estimated total liquidity of approximately USD 500m after accounting for availability under its USD 1.13bn asset-backed revolving credit facility and FILO facility, as well as approximately USD 186.2m in letters of credit.

Notably, the company announced on 5 January that it terminated the exchange offers and consent solicitations for its 3.749% senior notes due 2024, 4.915% senior notes due 2034, and 5.165% senior notes due 2044. The company noted that certain conditions had failed to be satisfied and therefore, the debt exchange offers and consent solicitations could not proceed. To date, approximately USD 215m of the company’s senior notes due 2024 remain outstanding.

As such, the company disclosed that, in light of its cash and liquidity projections as well as its recurring losses and negative cash flow of approximately USD 300m, substantial doubts exist regarding its ability to continue as a going concern. Indeed, news outlets have reported that law firm Kirkland & Ellis LLP, financial advisor Lazard, and consultant Berkeley Research Group have been advising the company for some time now on strategic alternatives.

Making the Chapter 11 bed

Despite Bed Bath & Beyond’s going concern warning, the company is attempting to address its liquidity crunch. Indeed, as noted on its 3Q22 earnings call, among other things, the company is making efforts to address its merchandising issues, including increasing its national brands offerings (while decreasing its own private label offerings) as well as improving its relations with suppliers to better its in-stock inventory levels. At the same time, the company has also been pursuing cost-saving initiatives, including the closure of approximately 150 stores by the end of fiscal 2022.

While these initiatives may help, it is unclear whether they can bring the retailer beyond its current financial woes. The company is facing a near-term need for liquidity given its present cash burn rate against its available total liquidity of approximately USD 500m. In addition, and as noted above, the company failed to carry out its proposed debt exchange offer for its senior notes, including the USD 215m 3.749% senior notes due 2024.

A Chapter 11 filing would likely offer the company some breathing room and an opportunity to streamline its balance sheet in the event the company is unable to timely secure a sufficient infusion of liquidity. However, whether the company will be able to restructure versus liquidate in a Chapter 11 will likely hinge on its ability to secure sufficient financing, which reports have suggested is likely. Rising interest rates, however, a result of federal monetary policy attempts to counter rising inflation, could complicate such efforts.

Retail bankruptcies generally

If Bed Bath & Beyond files for Chapter 11, it would join a long and high-profile list of retail debtors. Although we do not yet know the company's filing strategy (to the extent there is one) or which jurisdiction the company will file in, it is worth revisiting the prior wave of retail bankruptcies.

Retail bankruptcies peaked in 2020 following the onset of the COVID-19 pandemic, which led to the imposition of stay-at-home orders and forced the temporary closure of retail stores. Notable 2020 cases include Brooks Brothers Group, Neiman Marcus Group, Centric Brands, JC Penney Company Inc, Century 21 Department Stores, and Guitar Center Inc, each of which cited the coronavirus pandemic’s impact on sales. The dramatic increase in retail filings in 2020, however, was followed by an even more striking decline in 2021 and 2022 after stores reopened and customers returned.

The majority of retail bankruptcies from 2016-2022 consisted of free fall cases, accounting for approximately 50% of all Chapter 11 cases filed during that period, followed by cases involving prefiling sales, which comprised approximately 28%. As for venue, Delaware was the leading jurisdiction, overseeing approximately 45% of all cases filed, with the Southern District of New York coming in second at 15%.

Possible new wave of retail bankruptcies in 2023?

Aside from Bed Bath & Beyond, Party City is also reportedly considering Chapter 11 in the coming weeks after facing a decline in sales and its own liquidity constraints. Debtwire recently reported that investment bankers from JPMorgan made the rounds on behalf of Party City to gauge interest in a non-priming debtor-in-possession financing. To date, the effort has failed to draw support, likely setting the stage for existing secured holders to provide the financing with the caveat of rolling up prepetition debt.

Party City and Bed Bath & Beyond’s current financial situation thus begs the question as to whether the current economic landscape of high inflation and corresponding tightening monetary policy, resulting in increased consumer caution, is contributing to a perfect storm for further retail bankruptcies in 2023. Despite early signals of peaking inflation, the Federal Reserve has recently signaled that it will likely continue interest rate increases to achieve its long run target of 2% inflation. While it is difficult to predict with precision how things will pan out, continued increased rates will likely constrain companies’ abilities to refinance their debt and could contribute to declines in consumer demand, resulting in a reduction in sales and cash flow. The confluence of such factors, which Bed Bath & Beyond and Party City have already illustrated, may lead to an increase in distressed situations and the potential for Chapter 11 filings in the retail sector.

Hope springs eternal

News of Bed Bath & Beyond’s possible bankruptcy has nonetheless spurred speculation among retail investors of a possible merger and acquisition deal, resulting in a “meme-stock” rally for shares of Bed Bath & Beyond. On 9 January, shares of the company were up over 30% and by midday, approximately USD 114m in Bed Bath & Beyond shares were traded, which comprises approximately 73% of the company’s USD 157m stock market value. Whether the company will pull through and fulfill retail investor aspirations will yet to be seen.

Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.

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