Bed Bath & Beyond: My Brief MBA Case Study Write-Up

The Significance of Qualitative Factors in Solidifying a Firm’s Reputation

Michael V. Blumeyer

Began: 2/19/14, Completed: February 20th, 2014

Introduction

Bed Bath & Beyond (BBBY) was in the process of a large-scale expansion, having added 85 new stores in the preceding fiscal year.  After the second quarter of 2003, analyst had begun to become cautious after seeing the firm’s deteriorating ROE trend over a 10-year period.  On a positive note, however, there was a greater probability that BBBY could restructure their debt or promote them with an attractive dividend.

Compared with its other competitors, BBBY was not as seasonal, which gave it more transparency when analyzed investors applying fundamental analysis.  The company seemed to always be innovating year-round, adding fine china items and window treatments to its product line.  One of the firm’s strategies was to mitigate their expenses on furnishings and decorating and to concentrate their assets in solidifying quality in their merchandise.  This strategy allowed consumers to be surrounded by items that they could try out and purchase, allowing each store to position itself according to its promotion strategy.

The company acquired Harmon in March 2002, which was a discount health and beauty aid retailer that was accompanied with other product mixes.  This was great news to investors and eventually led to BBBY’s proud earnings report in 2004, which one reporter suggested that the conference call be titled “Bed Bath & Brag”.  In summary, the firm attracted investors due its exceptional customer service, high margins, and low cost structure.

Emerging Challenges of Skepticism in Seemingly Good Times

After BBBY made clear that its intention was to expand through adequate using its fund internally, investors became skeptical.  The main reason was valid: the firm’s return on equity (ROE) was declining, which was partly because of the drop in interest rates during this time of economic boom.  When reading the BBBY’s financial statements the first time, an investor could easily come to the conclusion that if the firm had no debt to owe, this would be a wonderful time to purchase shares of stock and hold as the company would expand, if seen in a linear fashion.  Form a critical perspective, there are valid reasons to be skeptical, which in a way, and is an opportunity for the firm to additionally see these small, but growing problems as an opportunity to position itself for growth as well as great transparency for reporting analysts.

Clarifying BBBY’s Position

It is imperative to clearly state that the firm’s position can be easily misunderstood, relative to its competitors.  The reason is because an analyst can quickly cultivate the delusion that certain key aspects of this case as positive indicators, while certain main points would be to explain in detail as to why there are “hidden weaknesses and threats” when analyzing BBBY’s financial statements.  We must also remember that, when considering the macroeconomic timeframe of this industry, consumer reports are becoming more positive as the United States has recovered from the “dot-com bust” in 2002.

Analyzing Key Ratios

To gain a further depth of understanding where there were challenges that were not so obvious for BBBY, I have done an analysis on a couple of the most imperative ratios relevant to the firm.  The main outcome that investors wanted to see clearly was how the firm would go about on optimizing capture structure.

This process could be executed through:

·         Maximizing ROE

·         In-depth analysis on how Business Development can Optimize Capital Structure through Investor Relations

Our main focus on this case study will be the analysis of ROE and how heavily investor relations can impact a firm, even when a firm has just acquired a competitor.

EBIT Interest Coverage Ratio

EBIT Interest Coverage	2002	2003	2004
	30.6	62.7	42.1

EBIT Interest Coverage = EBIT/Interest

Finding the EBIT Interest Coverage Ratio is used to determine the number of times the firm can easily can pay off its outstanding debt.  As the case study clearly stated, the firm had not yet taken action to expand through increasing their long-term debt.  This is generally a positive indicator for investors who have invested in a company that is efficient in retaining the ability to pay off their debt.  For BBBY, however, this is an interesting situation because experienced investors are expecting the firm to go into debt.  In contrast, this can be a negative indicator for analysts because it can indirectly signal that the firm is so conservative, even after a successful acquisition on Harmon, that they are not able to completely maximize resources.

Return on Equity (ROE)

ROE	2002	2003	2004
	23.0%	23.7%	23.2%

Return on Equity = Net Income/Shareholders’ Equity

The data for ROE was exported from researching the certain ratios, using the Bloomberg Terminal.  This is an indicator shows the amount of net income that is returned in the form, which is a percentage of shareholders’ equity.  In BBBY’s analysis of ROE for these three years, we can easily see that the ratios are very reliable, showing that there is dependability for a consistent return to shareholders.  For the case study on BBBY, this analysis is one of the most vital, but also opens up room to seek further answers when trying to find out where there are weaknesses in the firm.  In regards to the ratios, the firm has been able to keep their ROE at 23%.  Perhaps the drop of 7% has given investors reason to show concern.

Finding Distinctions from Reading the IBD Article: The Importance of Investor Relations

The IBD Article titled” How Herbalife Parried Short-seller With Deft Strategy” overlaps some key distinctions with the concept how to vital it is for management to possess healthy investor relations.  In summary, short-sellers seemingly saw an opportunity to try to expand negative news in the financial markets due to a possible problem in Herbalife’s ethical standards.  Fortunately for Herbalife, the company responded appropriately to the accusations by expanding their transparency to the news, bringing false articles into the spotlight, and sharing their vision and expectations to shareholders more specifically.  Relating this article to BBBY’s case, the firm should role-model the success that followed for Herbalife.  After taking appropriate actions to shareholders, analysts, reports, in a syntax that made sense, if BBBY followed the example of Herbalife, the level of health in terms of investor relations would spur on more good news.

Conclusion

The truth of the fact is, a company’s reputation certainly can “make or break” a company’s efforts, even after a successful acquisition from a competitor.  Even the ROA that was seen on the Bloomberg Terminal remained somewhat steady, except for a slight drop from 2003 to 2004.  The main point of this case is to realize how effective investor relations are to the firm’s success, despite stability ratios throughout multiple years of stable growth.  Hence, the business development and management part of BBBY at first, may not directly cause the numbers in their financial statements to expand or decrease, but they are the influencers in initiating and building momentum for the firm.  Transparency is certainly one of the most vital factors that experienced investors seek when going about where to allocate their assets.

The truth of the fact is, a company’s reputation certainly can “make or break” a company’s efforts, even after a successful acquisition from a competitor.Even the ROA that was seen on the Bloomberg Terminal remained somewhat steady, except for a slight drop from 2003 to 2004.The main point of this case is to realize how effective investor relations are to the firm’s success, despite stability ratios throughout multiple years of stable growth.Hence, the business development and management part of BBBY at first, may not directly cause the numbers in their financial statements to expand or decrease, but they are the influencers in initiating and building momentum for the firm.Transparency is certainly one of the most vital factors that experienced investors seek when going about where to allocate their assets.