Bed Bath & Beyond Inc. Rating Lowered To 'B+' On Operational Headwinds Exacerbated By Coronavirus; Outlook Negative

  • We believe Union, N.J.-based home furnishing specialty retailer Bed Bath & Beyond Inc. (BBBY), which is already struggling with operational challenges, will face significant top-line headwinds this year, as restrictive mandates to contain the coronavirus outbreak have led to store closures and deflating consumer confidence results in a swift and severe drop in consumer spending.
  • We expect BBBY's operating performance will be meaningfully weaker than our previous expectations, resulting in significant deterioration in credit metrics, with leverage exceeding 4x at the end of fiscal year 2020 (ending Feb. 28, 2021).
  • We are lowering all of our ratings on BBBY, including our issuer credit rating to 'B+' from 'BB'.
  • The negative outlook reflects the potential for a lower rating if performance comes under further pressure because of an extended disruption to consumer spending or weaker-than-expected subsequent recovery that hinders the company's ability to restore credit metrics in fiscal 2021 and/or cause us to view the company's competitive standing less favorably.
NEW YORK (S&P Global Ratings) March 27, 2020--S&P Global Ratings today took the rating actions listed above.
The downgrade reflects our view of Bed Bath & Beyond Inc.'s (BBBY's) earnings prospects as meaningfully weakened and our expectation for significant deterioration in credit metrics this year.  BBBY recently announced the temporary closure of all but 175 of its 1,500+ stores across North America from March 23 through April 3, 2020. We believe closures, which temporarily elevate cash burn, could be extended for more than a month, given the increasingly drastic actions governments are taking to quell the rapid rise in new COVID-19 cases. BBBY's online channel, representing a moderate percentage of total revenues, remains operational and could modestly offset some of the impact from the closed stores. Still, we believe consumer demand will be depressed over the next few quarters as confidence rapidly deflates from mounting uncertainty over the severity and duration of the outbreak. In addition, we expect consumers to trade down to lower-priced merchandise offered by competing discounters and mass merchandisers during an economic slowdown, further depressing BBBY's already challenged sales and margins. As a result, we believe credit metrics will deteriorate significantly in the near term, resulting in leverage spiking up to above 4x at the end of fiscal 2020 from just about 3x at the end of third-quarter fiscal 2019. Moreover, we think that near-term performance pressures could erode headroom on the 3.75x maximum leverage covenant under BBBY's revolving credit facility, requiring the company to seek a waiver or amendment. As pressure alleviates beginning in the second half of calendar year 2020, we expect gradual improvement in BBBY's credit metrics, with leverage improving to the high-3x area at the end of fiscal 2021. As a result of our projection for higher leverage, we are revising our financial risk profile assessment to aggressive from intermediate.
The negative outlook reflects the heightened uncertainty regarding the impact of the coronavirus pandemic and impending recession on BBBY's financial condition. A prolonged store closure, coupled with a slowdown in consumer spending could affect the company's ability to recover operationally.
We could lower the rating if BBBY cannot recover from the effects of pandemic or the subsequent recessionary macroeconomic environment is more severe and prolonged than we currently expect, such that leverage rises to and stays above the 5x area at the end of fiscal 2021. In addition, we could also lower the rating if BBBY continues to lose market share while making no significant headway on its initiatives, leading us to view its competitive standing less favorably.
We could revise the outlook to stable if the impact of the pandemic is less severe than what we currently anticipate. For a higher rating, we would expect to see significant traction on the company's strategic initiatives, resulting in stabilizing operating performance. Under this scenario, we would expect leverage below 5x and positive free operating cash flow on a sustained basis.
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