Bed Bath and Beyond: Capital Structure Decision (HBR Case Study)
Introduction
Bed Bath & Beyond (BBBY) was founded in 1971 by Warren Eisenberg and Leonard
Feinstein. BBBY held its initial public offering in June 1992, on the NASDAQ exchange. The company utilizes the “big box” retail concept and focuses its product offerings around domestics merchandise and home furnishings. Since its IPO BBBY has been favored by equity investors and long considered one of the best performing retail companies. They have never missed an earnings estimate and have experienced a fortyfold increase in stock price from the original $17 per share IPO.
The company introduced its first superstore in 1985 and have since underwent large scale expansion operating 575 stores by the end of the fiscal year 2003. BBBY also owned and operated 30 Harmon stores and 24 Christmas Tree Shops stores by
2003. (See appendix four for SWOT analysis)
The Problem
Bed Bath & Beyond has always conducted business under the old fashioned premise that “cash is king, and debt is bad”. As of late their capital structure has become a big issue amongst investors. They are concerned that the current unlevered structure is not maximizing value and are wary of the risks associated with the companies large and growing cash balances. Currently BBBY is facing the issue of trying to decide wether their current capital structure is optimal moving into the future, and if not, what decisions they need to make to achieve optimization. The following analysis will outline the key factors influencing this decision and ultimately suggest a course of action.
Case 2: Bed Bath & Beyond
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Case Analysis
Capital Structure
BBBYʼs capital structure is not optimal, as BBBY has a large cash position and they do not issue any debt nor do they pay any dividends during their operation. M&M proposition I states that the value of firm is independent to its capital structure and therefore the mix between debt and equity is irrelevant. However assumptions under the M&M
Bed Bath & Beyond (BBBY) was founded in 1971 by Warren Eisenberg and Leonard
Feinstein. BBBY held its initial public offering in June 1992, on the NASDAQ exchange. The company utilizes the “big box” retail concept and focuses its product offerings around domestics merchandise and home furnishings. Since its IPO BBBY has been favored by equity investors and long considered one of the best performing retail companies. They have never missed an earnings estimate and have experienced a fortyfold increase in stock price from the original $17 per share IPO.
The company introduced its first superstore in 1985 and have since underwent large scale expansion operating 575 stores by the end of the fiscal year 2003. BBBY also owned and operated 30 Harmon stores and 24 Christmas Tree Shops stores by
2003. (See appendix four for SWOT analysis)
The Problem
Bed Bath & Beyond has always conducted business under the old fashioned premise that “cash is king, and debt is bad”. As of late their capital structure has become a big issue amongst investors. They are concerned that the current unlevered structure is not maximizing value and are wary of the risks associated with the companies large and growing cash balances. Currently BBBY is facing the issue of trying to decide wether their current capital structure is optimal moving into the future, and if not, what decisions they need to make to achieve optimization. The following analysis will outline the key factors influencing this decision and ultimately suggest a course of action.
Case 2: Bed Bath & Beyond
page | 1
Case Analysis
Capital Structure
BBBYʼs capital structure is not optimal, as BBBY has a large cash position and they do not issue any debt nor do they pay any dividends during their operation. M&M proposition I states that the value of firm is independent to its capital structure and therefore the mix between debt and equity is irrelevant. However assumptions under the M&M
Cited: Artur Raviv, T. T. (2007, 4 1). Bed Bath & Beyond: The Capital Structure Decision Heitor Almeida, T. P. (2004, 10 1). How should we discount the costs of financial distress KISGEN, D. J. (2006, 6). Credit Ratings and Capital Structure. THE JOURNAL OF FINANCE, LXI(3).