Bbby Case Analysis

Executive Summary

Bed Bath & Beyond (BBBY) was founded in 1971 by Warren Eisenberg and Leonard Feinstein. BBBY had been one of the early pioneers of the “big box” retail concept, which entailed dedicating a large, stand-alone store to a category that had previously been part of the offerings of large, general merchandise stores. In FY 2003, the Company had cash, cash equivalents, and short-term investment securities balances of $867 million, with no long-term debt.

Based on our quantitative analysis in the Exhibits, we recommend BBBY a Debt-to-Total Capital Ratio of 35%, under which situation the WACC would reach its minimum at 7.86% and the Company would operate at the optimal capital structure. Further detailed explanation will be shown in our Conclusion and Recommendation Section.

Background & Identification of the problem/issue

At the end of FY 2003, BBBY’s cash, cash equivalents, and short-term investment securities on hand had grown more than 40% when compared to the preceding year to $867 million. It was estimated that BBBY’s cash balance was $400 million higher than its ongoing requirements for growth and operations. Analysts expressed some concern about deteriorating ROE, as the interest earned on investments had been subject to declining interest rates.

Indeed, in FY 2003, BBBY’s cash and cash equivalents was 30.25% out of its total assets, which was much higher than any competitor’s Cash-to-Total-Assets Ratio in the industry. (See exhibit D). Also, among its current assets, BBBY’s cash and cash equivalents had a percentage as high as 85.60%, which was slightly lower than the highest two in the industry. Both of them indicate BBBY had too much cash on hand.

As the leading company in the industry, BBBY was fully financed by equity. It did not take any debt during its past operation. However, the financing needs of BBBY were large since going public. BBBY had opened 541 stores, and acquired Harmon and CTS for $25 million and...