The Untimely Death of Bed, Bath, and Beyond

To start with, I should probably admit that I never really liked this store.   With the partial exception of the kitchenware, the rest of the inventory might as well have been invisible.  If the assorted bedding, towels, and whatever else was in there had been free for the taking, I doubt that I would have left with anything.

Since I enjoy cooking, and live in a New Mexican desert where there is a shortage of stores that sell kitchenware, I would occasionally pick up a small item or two there.  And I might window shop there to compare items before I bought them more cheaply online.  Overall, this was just another store, like Hobby Lobby, Michael’s, and Best Buy, that holds absolutely no interest for me.  After all, it’s not like they sell books.

Still, B3 was a Fortune 500 company whose 1530 stores had an annual revenue of over $12 billion and its demise needs to be examined.  Unfortunately—particularly for its employees—an economic postmortem shows that B3 committed suicide.

The company started 52 years ago when two managers, Leonard Feinstein and Warren Eisenberg, lost their jobs when a New York regional department store folded.  Correctly predicting that the day of the department store was over, the two men opened a specialty store that sold only bedding and linen.  

Originally called Bed ‘n Bath, this was one of the first of the specialty stores that eventually came to be known as “Meme Stores” or “Category Killers” that rapidly spread across the country.  Chains like Best Buy, Ikea, OfficeMax, and Barnes and Noble built large superstores overstuffed with narrow lines of inventory that overwhelmed the competition since a department store that could only hold a narrow inventory in each category.  Shoppers that needed a widget naturally went to Widget World where they could select between numerous models of both left and right-handed widgets.

Bed ‘n Bath faced competition from similar stores, so Feinstein and Eisenberg came up with a marketing plan that made their fledgling company a success.  Changing the name to Bed, Bath, and Beyond, they added kitchenware and standardized an appealing store design.  The stores were very large, roughly 20,000 square feet, with high ceilings and inventory stocked so high that customers could easily discern the different departments.  Instead of the usual advertising, B3 mailed out discount coupons.  Hundreds of millions of coupons each year, with at least half of those damn little blue and white discount coupons being mailed to my house.  

Part of the marketing plan was pure genius.  Individual store managers were given the authority to vary the inventory in their stores to fit the needs of the customers who shopped there.  If the corporate chain running the local grocery store was smart enough to do that, then the shoppers wouldn’t be forced to choose among items that some idiot in Chicago erroneously believes are the ingredients for Mexican food.  

The marketing strategy worked for a long time.  The company expanded, opening new stores across the country, and the stock price grew dramatically.  But, just as the department stores declined over time due to new innovations, so too did the new specialty stores.  Slowly over time, e-commerce began to steal sales from traditional large box stores.

Most of the surviving box stores countered this with an online operation of their own.  A few companies, like Sears, B3, Circuit City, and Federated failed to do this properly and none of them are still in operation.  Sears in particular failed at this, though they had an online operation, it was impossible to use.  I tried to buy a Craftsman weed eater from them once and found it listed on their website multiple times with five different prices, all of which were higher than the same product on Amazon.  If you can buy a Sears product from Amazon cheaper than you can buy it from Sears…. Well, it doesn’t take a fortune teller to predict the chain’s demise.

Facing declining sales, the Board of Directors for Bedbugs, Battleaxes, and Boredom held a small revolution, the founding partners resigned, and a new Chief Financial Officer was hired.  Gustavo Arnal was brought in to save the company with a new marketing plan.  At the same time, Ryan Cohen was elected to the Board after buying ten percent of the outstanding stock.  Each of these men had an independent plan for the company.

Arnal wanted to introduce store brands to the outlets.  A B3 labeled product would assure the customer of quality while simultaneously making the company more profits.  All the surviving big box chains do this, and it is usually a successful strategy.  In the case of B3, the new products were introduced too rapidly, and sales of the new line were sluggish—and when Covid hit they all but stopped.  To counter this, the company resorted to issuing even more little blue discount coupons.  While the strategy did continue to bring in shoppers, the discounted sales were not profitable.  For the last five years the chain was in operation, sales climbed each year even as profits steadily declined.

Still, the company would have survived if not for the actions of Ryan Cohen and the rest of the board of directors.  The Board began an aggressive campaign of buying back the company common stock.  As each share of stock is purchased, the value of the stock still issued rises on the market as the total value of the company is divided among a smaller number of stockholders.

Contrary to what numerous politicians scream about, there is nothing inherently wrong about a company repurchasing its own stock, just as there is nothing wrong when the company sells its stock.  As Warren Buffet once said, critics of stock buybacks are “either an economic illiterate or a silver-tongued demagogue” or both, and all investors benefit from them as long as they are made at the right prices.

In the case of B3, the price was horribly wrong as the company paid an average of $44 a share for a stock that should have been valued in the single digits.  Worse, the company was selling bonds to raise the cash to buy the stock, incurring an ever larger debt.  Altogether, the Board of Directors paid over $12 billion to purchase some of the stock of a company that was worth, in total, an estimated $500 million.

Now there is a tactic for selling stock that is called “pump and dump” where you artificially raise the price of a stock you own so you can sell at an inflated price.  This “pump and dump” tactic is illegal.  Far be it for me to insinuate that someone in the company was guilty of this—at least in print—but some people made a lot of profit by selling their B3 stock off for a lot more than they had paid for it.  For instance, Ryan Cohen made a profit of $68 million by selling his stock in the summer of 2022.

If the company hadn’t borrowed so much money by selling those bonds, there would have been no problem.  Even with the bonds, it was possible for the company to survive, perhaps by selling more stock or selling off all or part of the company to raise funds.  Instead, Gustavo Arnal jumped out a window and committed suicide.  The fact that Arnal committed suicide just days after a $1.2 billion lawsuit was filed against both Arnal and Cohen is probably an accident.

You can imagine what that did to the price of that stock.  It dropped like….well, a CFO falling from the 18th floor of his apartment building.

The company folded and all assets were sold.  One of those assets was the company name, which sold to Overstock.com for $21.5 million.  Overstock, now rebranded as Bed, Bath, and Beyond, is now selling goods exclusively online.

So, did Cohen deliberately kill B3 to make a profit off of the carcass?  It's a little confusing and the Feds are still investigating.  But remember that weird stock trading scandal a couple of years back involving Gamestop?  The one where the stock shot up 1500% and the company officers dumped their stock just before the price crashed?  Cohen was on the Board of Directors of that company, too.