Bed Bath & Beyond Inc. (NASDAQ:BBBY)

The period under review demonstrates a volatile financial performance, particularly concerning economic profit. Net operating profit after taxes (NOPAT) fluctuated significantly, transitioning from positive values to substantial losses and then a partial recovery before declining again. Invested capital consistently decreased throughout the observed timeframe, while the cost of capital also exhibited variability.

Economic Profit Trend

Economic profit consistently remained negative throughout the entire period. The magnitude of the negative economic profit increased from approximately US$150 million in 2017 to over US$948 million in 2020, before decreasing to US$651 million in 2022. This indicates that the company’s returns on invested capital were consistently below its cost of capital.

NOPAT Performance

NOPAT began at US$935 million in 2017, decreased to US$735 million in 2018, and then experienced a significant decline, resulting in a loss of US$83 million in 2019. This loss expanded dramatically to US$523 million in 2020. A partial recovery was observed in 2021 with NOPAT reaching US$98 million, but this was followed by another loss of US$301 million in 2022.

Cost of Capital Fluctuations

The cost of capital started at 16.25% in 2017, decreased substantially to 8.36% in 2020, and then increased to 10.64% in 2022. The decrease in the cost of capital in 2020 did not translate into positive economic profit, likely due to the substantial decline in NOPAT during the same period.

Invested Capital Reduction

Invested capital showed a consistent downward trend, decreasing from approximately US$6.7 billion in 2017 to US$3.3 billion in 2022. This reduction in invested capital occurred alongside declining NOPAT, potentially indicating divestitures or reduced investment in operations. Despite the decreasing capital base, economic profit remained negative, suggesting that the core business was not generating sufficient returns.

In summary, the financial performance reflected in these figures indicates a consistent failure to generate returns exceeding the cost of capital. The combination of declining NOPAT and a decreasing invested capital base contributed to the sustained negative economic profit throughout the period.

Net Earnings (Loss)

The net earnings demonstrate a declining trend over the observed periods. The company reported positive earnings in 2017 and 2018, with figures of approximately $685 million and $425 million respectively. However, from 2019 onwards, the net earnings turned negative, with losses deepening each year. The largest loss was recorded in 2020 at around $614 million, followed by losses of approximately $151 million in 2021 and $560 million in 2022. This pattern indicates a significant deterioration in profitability beginning in 2019.

Net Operating Profit After Taxes (NOPAT)

The NOPAT values show a similar trajectory to net earnings. Positive and relatively strong NOPAT were recorded in 2017 and 2018, amounting to approximately $935 million and $735 million respectively. In 2019, NOPAT dropped sharply to a negative value of about $83 million, continuing the downward trend into 2020 with a significant loss of roughly $523 million. An improvement was noted in 2021 when NOPAT turned positive again at approximately $98 million, but this was not sustained, as 2022 saw a return to negative territory with a loss nearing $301 million. These fluctuations highlight instability in operational profitability and challenges in maintaining post-tax operating profits.

The analysis of the financial data reveals several notable trends in the provision for income taxes and cash operating taxes over the examined periods.

Provision (benefit) for income taxes

The provision for income taxes demonstrates significant fluctuations and a downward trend from 2017 through 2021, followed by an upward reversal in 2022. Initially, there was a substantial provision of $380,547 thousand in 2017, which decreased to $270,802 thousand in 2018. In the subsequent years, this provision shifted into negative territory, reflecting income tax benefits rather than expenses, with -$19,385 thousand in 2019, further deepening to -$185,989 thousand in 2021. However, in 2022, there was a sudden reversal with the provision increasing to a positive figure of $86,967 thousand. This shift indicates considerable volatility in the company's tax-related expenses and potential fluctuations in profitability or tax strategies.

Cash operating taxes

Cash operating taxes exhibit a pronounced downward trajectory with considerable variability. Beginning at $355,672 thousand in 2017, cash taxes paid plummeted to $161,195 thousand in 2018 and further declined to $126,720 thousand in 2019. The downward movement continues sharply in 2020 and 2021, reaching negative values of -$294,013 thousand and -$3,389 thousand, respectively. The negative values during these recent years suggest significant tax refunds or reductions, possibly related to tax credits, loss carrybacks, or adjustments in cash tax payments. The sharp decline and negative amounts indicate irregular tax cash flows, which could reflect tax planning measures or operational challenges affecting taxable income.

Overall, both income tax provisions and cash operating taxes indicate a period of decreasing tax expenses followed by irregularities and eventual volatility in recent years. These patterns might be linked to changes in profitability, tax laws, or strategic financial management, warranting further detailed investigation into underlying causes and potential impacts on the company's financial position.

Total reported debt & leases

The total reported debt and leases exhibit a general downward trend over the analyzed period. Beginning at approximately $4.2 billion in early 2017, the figure decreases gradually to about $3.8 billion by early 2019. There is a slight uptick in early 2020 to around $3.9 billion, followed by a more pronounced decline to just over $3 billion by early 2021, after which it stabilizes near $3.07 billion in early 2022. This trend indicates a significant reduction in the company's indebtedness and lease obligations over the six-year span.

Shareholders’ equity

Shareholders’ equity shows a marked downward trajectory throughout the period. Starting at approximately $2.7 billion in early 2017, it experiences moderate fluctuations but declines substantially after 2019. The equity falls sharply from about $2.56 billion in 2019 to roughly $1.76 billion in early 2020, followed by a further decline to approximately $1.28 billion in early 2021. By early 2022, equity dwindles considerably to about $174 million. This significant erosion suggests ongoing losses or other factors negatively impacting retained earnings and overall net asset value.

Invested capital

Invested capital declines steadily over the analyzed period, beginning at roughly $6.7 billion in early 2017 and decreasing consistently year-over-year. By early 2020, invested capital stands near $5.1 billion, continuing to diminish to approximately $4.3 billion in early 2021, and further down to nearly $3.3 billion in early 2022. This consistent reduction reflects a contraction in the company’s total capital employed, which aligns with decreases in both shareholders’ equity and debt levels.

The financial performance, as indicated by economic value added metrics, demonstrates a consistently negative economic profit over the analyzed period. Invested capital has generally decreased, while the economic spread ratio has exhibited increasing negativity.

Economic Profit

Economic profit consistently registers as negative throughout the period, ranging from a low of -948,737 (in thousands of US dollars) to a high of -6,883. The magnitude of the negative economic profit generally increased from 2017 to 2020, before decreasing slightly in 2021, and then increasing again in 2022. This indicates the company consistently failed to generate returns exceeding its cost of capital.

Invested Capital

Invested capital decreased steadily over the six-year period, declining from 6,680,896 (in thousands of US dollars) in 2017 to 3,288,320 in 2022. This reduction in invested capital may reflect asset sales, reduced investment in working capital, or other capital management decisions. The decreasing trend is consistent across all years examined.

Economic Spread Ratio

The economic spread ratio, expressed as a percentage, shows a clear downward trend. Starting at -2.25% in 2017, it becomes increasingly negative, reaching -19.81% in 2022. The most significant declines occurred between 2018 and 2019, and again between 2019 and 2020. This worsening ratio suggests a growing disparity between the return on invested capital and the cost of that capital. The ratio’s consistent negativity reinforces the negative economic profit observed.

In summary, the observed trends suggest a deteriorating financial position with respect to value creation. The consistent negative economic profit, coupled with the declining invested capital and increasingly negative economic spread ratio, indicates a growing challenge in generating returns that cover the cost of capital.

The economic profit margin demonstrates a consistently negative trend over the observed period. While initially a relatively small negative value, the margin deteriorates significantly, reaching its most negative point in 2022.

Economic Profit Margin Trend

In 2017, the economic profit margin was -1.23%. This represents a modest negative return on net sales. A slight improvement was noted in 2018, with the margin increasing to -0.06%, indicating a reduced economic loss. However, this improvement was short-lived.

From 2019 onwards, the economic profit margin experienced a substantial decline. It decreased to -6.26% in 2019, then to -8.50% in 2020, and further to -5.50% in 2021. The most significant deterioration occurred in 2022, with the margin reaching -8.28%.

The consistent negativity of the economic profit margin across all observed years suggests that the company’s returns are consistently below its cost of capital. The increasing negative trend indicates a widening gap between returns and the cost of capital, potentially signaling increasing financial distress or inefficient capital allocation.

The economic profit itself mirrors this trend, consistently reporting negative values throughout the period. The magnitude of the economic loss increases substantially from 2017 to 2020, before decreasing slightly in 2021, and then increasing again in 2022. This reinforces the conclusion that the company is consistently destroying economic value.

Relationship between Net Sales and Economic Profit Margin

While net sales generally decreased over the period, the economic profit margin’s decline was more pronounced. This suggests that the decline in profitability is not solely attributable to lower sales volume, but also to factors impacting cost of capital or operational efficiency. Even with relatively stable sales in 2018, the economic profit margin remained negative, and the subsequent decline in sales was accompanied by a worsening margin.

The observed pattern suggests a growing concern regarding the company’s ability to generate returns exceeding its cost of capital. Continued monitoring of these metrics is crucial to assess the sustainability of the business model and the effectiveness of any implemented corrective measures.