Bed Bath and Beyond Case

Muhaib Ali

Finc 357

Prof. Thompson

2/23/19

Bed Bath Beyond Case Write-Up

1. Executive Summary

We recommend that Bed Bath and Beyond take on a 20% debt because they have never taken had the experience before, and it would help to satisfy investor needs of shrinking/matching shareholders equity. The company appears to have a large amount of excess cash on hand that ends up sitting there with no use. It’s not being reinvested back into the company nor is it being paid out to shareholders as dividends which also shows low capital expenditures. Bed Bath and Beyond as of right now has a very problematic capital structure, this is because the company has no debt; interest rates are at their lowest right now as well. In terms of leverage in comparison to the currently high amount of shareholders equity we have none, and as shareholders equity continues to grow return on equity becomes worse.

1. Statement of Key Assumptions

        We relied on the pro forma analysis of 40% debt which includes EBIT, EBITDA, Interest Income, Tax Rate (assuming no change in future), as well as a stock Price assumed to be at $37 a share in order to calculate the adjusted debt to capital numbers (see case exhibit 8). We also made use of Bed Bath and Beyond’s financial data in order to forecast growth rates for net sales and earnings (see case exhibit 1). We also used financial comparables in order to assume that Bed Bath and Beyond has accurate financials and is in a better position to take on debt, compared to its competitors (see case exhibit 6). We also made modifications to the standartd and poor 3-year median key financial bond calculations and ratios by using the A-rated bond numbers in order to make our projected future calculations (see exhibit 7). We made the assumption that Bed Bath and Beyond shares are being accurately priced within the market, which means they are being efficiently priced every time. We assumed shareholder confidence would not decrease from with the issuance of 20% debt. We also assumed there would be no change in the corporate bond A rate of 5.75% or any change within the corporate tax levels. We expect the company to have near or over $3 billion in their cash balance if they continue to not use it at all and let it rot away.

1. Analysis

        With our adjustments made to Case exhibit 8 based on our assumptions above, we performed a full 2003 pro forma analysis of BBBY if it chose to take on 40% debt. After calculations we found that the pro forma EBIT 40% debt for all of 2003 was less than that of the actual EBIT for 2003. The pro forma was modified in order to calculate the incurrence of 20% debt in regards to its effects on sales, net operating profit, as well as any interest income or expenses they may occur. With our 20% debt adjustment the EBIT adjustment coverage stays up above a 35 (whereas anything close to 11 is considered bad/weak). The funds from operations/total debt doubles from 86% to 172% when debt costs are cut to the minimum of 20%; the company’s free operating cash flow stays at a very low amount as well which in turn is great for investors and the company in general. With debt incurred at 20%, Bed Bath and Beyond can avoid investors worrying about the company having too much cash on hand and no use for it. This also reduces the chances that a bond rating agency would lower their currently A-rated bond. Taking on a 20% debt is only a small risk for the company even though it has zero experience in handling debt. Since they have more than enough cash on hand to cover any future expenses, we recommend that the company can easily take on a 20% debt, pay it back, and then assess whether or not it worked in benefit for the company.