Target’s Bad News Is Even Worse for Bed Bath & Beyond

last week, Target (TGT -1.46%) slashed its fiscal 2022 guidance for the second time in less than a month. Rising inventory levels and a demand slowdown in many discretionary merchandise categories are combining to pulverize Target’s profitability.

On the bright side, while 2022 will be painful for Target, the discount retail giant remains solidly profitable and should bounce back within a year or two. The same can’t be said for Bed Bath & Beyond (BBBY 7.34%), though. A sharp drop in home furnishings demand represents an existential threat for the troubled retail icon.

The outlook was already bad

Two months ago, Bed Bath & Beyond reported awful results for the final quarter of its 2021 fiscal year. Comparable sales declined 12% year over year. Meanwhile, surging supply chain costs crushed its profitability, causing adjusted EBITDA to fall by nearly $200 million year over year, plunging into negative territory.

At the time, Bed Bath & Beyond executives warned that business conditions were still deteriorating. Comparable sales plummeted more than 20% in the first six weeks of fiscal 2022. In the near term, supply chain pressures will constrain sales while hurting gross margin.

The exterior of a Bed Bath & Beyond store.

Image source: Author.

This puts Bed Bath & Beyond on track to report another huge drop in adjusted EBITDA for the first quarter. As of April, management didn’t expect significant improvement until the second half of the fiscal year.

Another big red flag

Last month, Target slashed its full-year margin guidance. The retailer explained that it had been caught flat-footed by a rapid shift in consumer buying behavior and would need to ramp up clearance discounts in discretionary merchandise categories (including home).

Just three weeks later, Target cut its guidance again. Management added, “Specifically, the Company is planning for continued strength in frequency categories like Food & Beverage, Household Essentials and Beauty, and is planning more conservatively in discretionary categories like Home, where trends have changed rapidly since the beginning of the year.”

If home furnishings demand has continued falling at Target, it’s a safe bet that Bed Bath & Beyond is faring even worse. After all, Target can still rely on its “frequency categories” to draw in customers and hope for impulse purchases in the home department. By contrast, if consumers are trying to spend less on home furnishings, they won’t visit Bed Bath & Beyond at all.

It’s not surprising that consumers are now cutting back on home furnishings purchases following two years of big spending increases. High inflation and the end of pandemic-related stimulus programs are chipping away at consumer confidence. Meanwhile, consumers are reallocating their shrinking discretionary budgets toward travel and other experiences.

A recipe for disaster

In short, falling home furnishings demand makes Bed Bath & Beyond’s turnaround plan look unrealistic. While consumer spending on home items should bounce back eventually, Bed Bath & Beyond may not be around to capitalize on that recovery.

Bed Bath & Beyond foolishly spent nearly $600 million on share buybacks during fiscal 2021 despite burning more than $300 million of cash over the course of the year. As a result, it ended the year with just $459 million of cash and investments on hand: down from nearly $1.4 billion a year earlier. With worsening business conditions, the company is likely to burn even more cash in fiscal 2022. That could nearly exhaust its current cash stockpile by year-end.

Given the company’s rapidly deteriorating fundamentals, I’m skeptical that Bed Bath & Beyond will be able to raise new capital to shore up its liquidity. Debt investors seem to agree. Bed Bath & Beyond’s debt due in August 2024 — which traded near face value in early April — has fallen to 73 cents on the dollar and now yields 20%. This highlights investors’ uncertainty about Bed Bath & Beyond’s ability to repay that debt.

Bed Bath & Beyond shares have lost nearly 80% of their value over the past year, and for good reason. With the core business hemorrhaging cash and business conditions getting worse, investors should continue to avoid Bed Bath & Beyond stock.

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