Tag: Share buybacks

Bed Bath And Beyond: Another Retailer Bites The Dust

The Daily Escape:

Super bloom, Carrizo Plain NM, CA – April 2023 photo via Today’s California

Bed Bath and Beyond (BBBY) filed for Chapter 11 bankruptcy on April 23. It said it will liquidate its assets and close its remaining stores unless it can find a bidder for the 360 Bed Bath and Beyond stores and for the 120 buybuy BABY stores.

A little history: A year ago, the prices of their bonds began to collapse. By August 2022, suppliers halted shipments due to unpaid bills. When this became public, its 30-year bonds, issued in 2014, plunged to 16 cents on the dollar (last Friday, they were at about 5 cents on the dollar).

From Wolf Richter:

“While all this was going on, the company promoted its latest turnaround plan and closed hundreds of stores. But you can’t turn around a failing brick-and-mortar retailer. On January 5th this year, the company issued a “going concern” warning.”

There are at least three lessons to take away from the BBBY story: First, they are the latest victim of the move to online shopping. People trusted Bed Bath & Beyond, and they had a pretty good e-commerce business. They could have done very well with it if they had accepted 10 years ago that they needed to phase out of their brick-and-mortar stores.

But brick-and-mortar retailers have difficulty letting go of their brick-and-mortar storefronts. They just can’t explain to their investors that their huge, fixed investment in physical stores are doomed and need to be closed.

Wolf has two great charts comparing the rapid growth in e-commerce and the steep drop in sales by brick-and-mortar retail over the past 15 years:

These two charts show that e-commerce basically replaced $5-9 Billion in annual in-store sales for the retail industry. The top chart shows that e-commerce had reached about $115 billion by 2023. The lower chart shows that in-store sales fell from $17 billion per year in 2008 to a low of $8 billion in 2020 before recovering to nearly $12 billion in 2023.

The second issue was that rather than investing in their business, BBBY spent $11.6 billion on share buybacks from 2005 to 2021. Since 2010, BBBY basically burned $9.6 billion in cash on its share buybacks. Like other companies, BBBY used share buybacks to drive up its share price, as “demanded” by its large shareholders and Wall Street. In addition, by not using that money to transition to e-commerce, they began driving the company towards April’s Chapter 11 filing.

A third problem was that the activists that won control of the BBBY board created a self-imposed disaster. While BBBY had withstood competition from Amazon earlier, in 2019, activist investors in control of its board hired a CEO who implemented a private-label product strategy. This led to customers no longer finding the national branded goods they expected on BBBY’s shelves. Products like AllClad, Kitchen Aid, Rowenta, Miele, Corning, Wustof and Braun. So customers bought them elsewhere. That sent sales down even further, and left BBBY in a cash-poor position.

Wrongo and Ms. Right occasionally shopped at our local BBBY stores, both here in CT and earlier in CA. We always thought it was a good value proposition, particularly for towels, sheets and pillows. Back then, the stores seemed well-stocked and the 20% off coupons didn’t hurt.

BBBY followed a classic path to failure: The retail founders preside over rapid growth. Then when Wall Street and the financers get involved, the founders step back. They then hire “professional” CEOs from their big retail rivals who apply whatever worked at their previous employer.

The new leadership skips the crucially important step of giving customers more of what they need than competitors do, focusing instead on sophisticated financial engineering.

All the while their aggressive rivals are going after their customers. This leads to a loss of market share, ultimately sending a once-proud retailing icon into bankruptcy. To BBBY’s credit, they outlasted far older, bigger and better financed competitors from Sears to Montgomery Ward to pretty much everyone else in their household-goods space.

Is late-stage Capitalism at fault in the BBBY story? You betcha.

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Boeing: Poster Child for Capitalism Reform

The Daily Escape:

La Sal Mountains in background, Canyonlands NP and Colorado River in foreground, UT – 2019 photo by Larnek

The Boeing 737 MAX story is getting worse. Just when you thought you had the whole story, you find more ugliness underneath. Ralph Nader published an open letter to Dennis A. Muilenburg, CEO of Boeing, and it’s quite the takedown, capturing the essence of Boeing’s problem:

“Aircraft should be stall-proof, not stall-prone.”

The stall-prone MAX was supposedly fixed, but then it failed. Nader has a personal interest in the MAX’s problems, since his niece, 24-year-old Samya Stumo, was among the 157 victims of an Ethiopian Airlines flight crash last month. Here’s a part of his letter:

“Your narrow-body passenger aircraft – namely, the long series of 737’s that began in the nineteen sixties was past its prime. How long could Boeing avoid making the investment needed to produce a “clean-sheet” aircraft and, instead, in the words of Bloomberg Businessweek “push an aging design beyond its limits?” Answer: As long as Boeing could get away with it and keep necessary pilot training and other costs low…as a sales incentive.”

Nader draws a connection between Boeing’s decision to “push an aging design” and their financial engineering.

“Did you use the $30 billion surplus from 2009 to 2017 to reinvest in R&D, in new narrow-body passenger aircraft? Or did you, instead, essentially burn this surplus with self-serving stock buybacks of $30 billion in that period?”

Nader notes that Boeing is one of the companies that MarketWatch labelled as “Five companies that spent lavishly on stock buybacks while pension funding lagged.” Their pension fund is only 79.6% funded. More:

“Incredibly, your buybacks of $9.24 billion in 2017 comprised 109% of annual earnings….in 2018, buybacks of $9 billion constituted 86% of annual earnings….in December 2018, you arranged for your rubberstamp Board of Directors to approve $20 billion more in buybacks.”

Nader’s focus on stock buybacks shows that Boeing had the capital to invest in developing a new plane. From Bloomberg in 2019:

”For Boeing and Airbus, committing to an all-new aircraft is a once-in-a-decade event. Costs are prohibitive, delays are the norm and payoff can take years to materialize. Boeing could easily spend more than $15 billion on the NMA, according to Ken Herbert, analyst with Canaccord Genuity….”

NMA means the New Middle-of-the-Market Aircraft. Boeing has already spent a total of $30 billion in share repurchases, with another $8 billion to come in 2019. A new aircraft would have cost half of that amount.

The main reason may have been Boeing’s earlier problems with the launch of the 787:

“In the summer of 2011, the 787 Dreamliner wasn’t yet done after billions invested and years of delays. More than 800 airplanes later…each 787 costs less to build than sell, but it’s still running a $23 billion production cost deficit.…”

The 737 MAX was Boeing’s answer. It allowed them to continue their share buybacks while paying for the 787 cost overruns. Abandoning the 737 for a new plane would’ve meant walking away from its financial golden goose. OTOH, someone should be responsible for the 346 deaths Boeing’s MAX has caused.

Finally, there are reports that some pilots are giving the MAX a vote of no confidence. The FAA has opened another 737 Max investigation based on reports on the FAA whistleblower hotline:

“A source familiar with the matter says the hotline submissions involve current and former Boeing employees describing issues related to the angle of attack sensor — a vane that measures the plane’s angle in the air — and the anti-stall system called MCAS, which is unique to Boeing’s newest plane.”

Reuters says:

“American Airlines pilots have warned that Boeing’s draft training proposals for the MAX do not go far enough to address their concerns, according to written comments submitted to the FAA.”

Stock buybacks like Boeing’s were once illegal because they are a type of stock market manipulation.

But in 1982, then President Reagan wanted to do his banker buddies a favor. So his Securities and Exchange Commission passed rule 10b-18, which created a legal process for share buybacks. That opened the floodgates for companies to start repurchasing their stock en masse.

Is it too much to ask that the Boeing CEO be asked to resign, even if he did kill a lot of people?

After all, wasn’t he only trying to maximize shareholder value?

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