Fitch flags Bed Bath & Beyond as higher default risk

Bed Bath & Beyond moved to the top tier of Fitch's "top market concern bonds" watch list for potential default following the retailer's recent disastrous financial results, Eric Rosenthal, the rating agency's senior director of leveraged finance, tells Axios.

Why it matters: Bed Bath & Beyond, as one of the remaining category killers in the home goods space, is more likely to share the fate of Toys R Us, rather than the turnaround Cinderella story of Best Buy.

Driving the news: The company, with nearly $1.38 billion in long-term debt, is moving quickly in the wrong direction, having been added to Tier 2 of Fitch's bond watch list earlier this month.

• And it's burning through a lot of cash, with negative adjusted EBITDA of $224 million for Q1 and available liquidity of about $900 million.
• "A restructuring later this year can’t be ruled out following the news," Rosenthal tells Axios.
• Bed Bath & Beyond did not respond to a request for comment.

Between the lines: The poor results were a blow to CEO Mark Tritton's turnaround plan, resulting in his firing and replacement on an interim basis by Sue Gove, a member of the board and the chair of its strategy committee.

Details: The retailer made all the moves you'd expect of a business struggling to revive its fortunes — selling assets, closing underperforming stores, introducing higher-margin private-label goods, and remodeling remaining locations.

Yes, but: The changes may have come too late, John Tomlinson, the global director of research at M Science, tells Axios.

• It takes several years to build up a private-label brand and a majority of Bed Bath & Beyond's sales still depend on branded products you can find elsewhere, Tomlinson notes.
• The aftermath of a global pandemic — along with inflation, interest rate hikes and the specter of a recession — continues to haunt the retailer.

What they're saying: Bed Bath & Beyond's foothold in the retail landscape could be strengthened if it becomes the destination for life events like weddings, births, back to school and starting college, Tomlinson says.

What we're watching: Bed Bath & Beyond is still evaluating its options for buybuy Baby, which could include its divestiture.

• When asked about a prospective sale during the quarterly earnings call yesterday, Gove called the initiative "a work in process" — but said the retailer continues to evaluate options for the business.

Reality check: A sale of buybuy Baby would infuse the company with much-needed cash, but leave the parent company with a poorly performing core business that needs fixing, Tomlinson says.

The bottom line: The next six months will be critical for Bed Bath & Beyond as it attempts to clear out inventory to prioritize cash preservation and attract top talent to its C-suite, which won't be easy, Tomlinson says.