Full disclosure, I hate shopping at Bed, Bath and Beyond. It makes me angry. That has prevented me from actually acting on this investment. But I wanted to present it to others who may find it interesting and one I may act on:
At 54 cents on the dollar, BBBY bonds yield 12.3% to maturity. If they can do the bare minimum turning the biz around, or sell an asset like BuyBuyBaby, it is a much higher IRR. If they ever hit the goal from their 2020 investor day, it’s a home run (but low odds). But I also do think there’s a decent chance they don’t do any share repos near term and buy back discounted debt instead.
What’s the situation?
I highly encourage people to read Andrew Walker’s post on BBBY, which opened my eyes to (i) how much cash they have and (ii) the opportunity to improve earnings. He’s also opened my eyes to how much cash they’ve squandered…
Long story short (which is a story I probably should have shorted), BBBY had an investor day in 2020 and said they thought they could go from ~$450MM of EBITDA at the time to $950MM by 2023! Woa!
The way 2022 is going, there is no f*cking way there are getting there. Retail has been hard enough. With BBBY, you’ve got a turn around story, too.
And lo and behold – their guide was horrible for ’22.
I calculate LTM EBITDA of $190mm as the turnaround plan ran up against snarled supply-chains. Now we have changing consumer trends, which Target called out. So expectations are just $51MM in EBITDA for FY’22 (ended Feb ’23) and then going to $260MM in ’23.
This all sounds pretty bad compared to their investor day goals of $950MM. Management credibility is bad. And with everything else going on, I’m not sure many have appetite to invest in retail right now.
But I am always looking for a way to make money in nasty situations that no one wants to touch. Is there a place where maybe you can take a downside-protected position with solid return baked in and also some upside if things do go right?
I’d look at the bonds….
BBBY 2034 bonds are trading at 54 cents on the dollar! Woo wee. And that foots to a ~930bps spread to treasuries and 12.3% YTM. And yes, these are registered (not 144a), so normal everyday joes can buy them (not investment advice lol).
How does the cap structure look?
With cash of $440mm and total debt of $1.2bn, I see total and net leverage of 6.2x and 3.9x, respectively. Total liquidity sits at $1.4bn.
I use the LTM EBITDA basically to acknowledge there are 1x factors in ’22 that I don’t think will crimp profitability in the future. I already mentioned $260MM is FY’23 estimate, that probably goes lower honestly, but I think $190MM actually isn’t a terrible mix between the next couple of years estimates. The market is forward looking after all
However, like I said, the BBBY bonds are at steep discounts to par. They have plenty of liquidity to take out the ’24s. Then its just the 2034s and 2044s – they have bought these back in the open market in the past!
Last but not least, they are currently marketing BuyBuyBaby, which actually grew comp sales in the latest Q (BBBY was -15%). I think equity holders are looking at a potential resumption of
terribly timed buybacks like they’ve done historically, but I wonder if they buy back bonds. This would create equity value in itself, take BK risk off the table, and be at attractive IRRs.
You Don’t Have to Hold to Maturity
Let’s say they take-out the ’24s, which I think is a given. They turnaround the business somewhat and by Aug-2025, the market ascribes a 650bps spread (I think this is pretty conservative – single Bs right now have a spread of 480bps). That foots to an 18.5% IRR in the bonds!
If you are a real bull, you might look at those 2044s at 43 cents on the dollar instead!
My calls thus far on retail with BIG and BBWI have been terrible. So go at it with your own risk!