Money Talks: Can Bed Bath & Beyond Make the Math Work On Its New Pre-pay Plan?

When Bed Bath & Beyond told its vendors last week it would begin paying in advance for all future merchandise orders, at least for the next few months, it was a bold move to regain the trust of its suppliers and allow it to restock its all-too-bare shelves.

But will it work?

Will BBB, which is running on financial fumes when it comes to its funding and credit lines, be able to come up with enough money to pre-pay for all those new orders that would hit its merchandise inventories starting in late spring and running through the balance of the year? It’s going to be a delicate balancing act, to be sure.

Doing the math is a tough exercise because with the drastic reduction in store count now in progress, it’s difficult to figure out exactly what the annual run-rate for the retailer will be. In its most recent quarter, the retailer did about $1.3 billion in top line revenue. (By the way, that’s down from about $1.9 billion a year ago.) But these third quarter numbers represent a store count that is roughly double the number of locations it expects to operate later this year when its multiple rounds of closings are completed. That will take it to about 360 Bed Bath stores plus about 120 BuyBuyBaby locations.

So, let’s make some assumptions. Many of the stores being closed are underperformers and vendors have said the company always got a dipropionate share of its revenue from its top doors. So, it you take that $1.3 billion in sales for the third quarter and extend it out for the next three quarters, that’s an annual run rate of $5.2 billion. With half as many stores remaining, let’s make the assumption that those locations, including online, represent two-thirds of its overall sales and that brings the projected annual revenue number down to about $3.4 billion.

Let’s go from there. Doing rough keystone math, it brings the company’s wholesale buy down to about $1.75 billion worth of annual merchandise it needs to purchase. That’s approximately $430 million it will have to spend per quarter if it pays for all its new merchandise going forward.

This back-of-the-envelope arithmetic doesn’t take into account any existing inventory or goods it will move from closed stores to those that will remain open. So, knock those quarterly checks it will have to write down to, let’s say, $375 million.

This is where things get a little murky. BBB is essentially at even now when it comes to its cash and credit on hand. It has some of each but they will no doubt be needed for ongoing debt service, store closing expenses, severance to the thousands of employees that are being let go and the basic costs of running a business.

On its calls with vendors last week the company said it will receive about $100 million a month for the duration of the year as part of the convoluted financial deal it set up with investors who are buying its stock at a discount. So, that’s about $300 million a quarter that will flow into Bed Bath’s checking account to be used for expenses. One can assume with a leaner operation and only its best performing stores still running, BBB’s operating losses will be significantly less that the roughly $350 million it has been losing every three months for the past several quarters.

Assuming you’re following my mathematical logic here (and full disclosure, I was a liberal arts major and math was not necessarily my strong suit) Bed Bath will need to use every single dollar – and then some – of its incoming cash to pre-pay its orders.

It’s a lot to ask. And let’s not forget this whole financial magic trick is dependent on the company’s stock staying above 72 cents a share. Today, it is trading at about $1.60 a share. That’s down by nearly half from just two weeks ago and a drop of some 75% from a brief spike in its price one day in early February. Last March the company’s shares traded as high as $27 a share. Even on its calls with suppliers last week the company’s interim CFO went to great lengths to say while there is the potential for a $1 billion investment this year it has only received about $225 million and there are no guarantees the rest will come in as planned.

So, back to the merchandise pre-pay. It was absolutely required by the retailer to re-open the pipelines with its suppliers. Even though there was no mention on the calls of how it would be handling previous orders bought on credit and as yet unpaid, vendors generally liked what they heard and were hopeful this new arrangement would be workable for both sides.

But $350 million a quarter – give or take a couple of trailer loads – is a big ask for a retailer still looking for change in its seat cushions. It’s not impossible and it’s as good a plan as they could come up with given the situation. But it remains a mathematical equation they never taught in any Retailing 101 class.

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