Bed bath & Beyond (BBBY) had no long-term debt on its balance sheet. Although many analysts considered BBBY's balance sheet a strength that permitted greater flexibility, some commented on the risks of its growing cash balance. These concerns raised questions about BBBY's capital structure. In early 2004, interest rates were at an all-time low, making it an attractive time to consider issuing debt and executing either a share repurchase or a one-time special dividend. Provides a few capital structure proposals for students to analyze
Balance Sheet for Bed, Bath and Beyond, FYE 2001-2003 ($ in thousands)
Income Statement for Bed, Bath and Beyond, FYE 2001-2003 ($ in thousands)
Statement of Cash Flows for Bed, Bath and Beyond, FYE 2001-2003 ($ in thousands)
Pro Forma 2003 Results for Alternative Capital Structures ($ in thousands)
How would you characterize the business risk of BBBY? Review the financial performance.
Is BBBY a good candidate for increased financial leverage? What are the pros and cons for increasing the leverage of the company?
Does BBBY really have no debt? What does the balance sheet look like after adjusting for operating leases?
Do you think BBBY has too much cash? should BBBY lever up? Consider both the 40% and 80% debt-to-total capital proposals.
What capital structure would you recommend as appropriate for BBBY? How much financial risk would BBBY face at each proposed levels of debt?
How much potential value, if any, can BBBY create for its shareholders at each proposed level of debt?
How would the capital markets react to a decision by the company to increase the use of debt in the capital structure?
How might BBBY implement a more aggressive capital structure policy? What are the alternative methods for leveraging up?
What is your estimate of the change in the stock price of BBBY if the company recapitalized by issuing debt to buy back stock? Assume multiple scenarios in regards to the size of the repurchase. Would you recapitalize the company?
What arguments would you advance to persuade management to adopt your recommendations?