S&P Global Ratings downgraded Bed Bath & Beyond’s debt to near-junk status on Thursday, predicting continued headwinds for the home furnishings retailer amid a “challenging operating environment.”
S&P lowered its rating on Bed Bath & Beyond from BBB+ to BBB, two notches above junk, and also put the company on negative outlook, indicating it could issue another downgrade in the next 12 to 24 months.
“The rating action reflects the company’s underperformance of our expectations in the first half of fiscal 2017, and our forecast for continued weak operating results and gradually deteriorating credit metrics amid a challenging operating environment,” S&P explained.
The rating agency said Bed Bath & Beyond was facing accelerating expansion from online retailers that “offer customers speed, convenience, and compelling values that traditional retailers have found hard to match.”
“While we continue to view the company as a leader in the home furnishing retail industry, we expect increased competition, higher promotional activities and costs related to the omni-channel platform will hurt performance over the next 12 to 24 months, with continued moderate decline in same store sales and margins,” S&P warned.
The downgrade follows a tough second-quarter for Bed Bath & Beyond, which reported a decline of 2.6% in same-store sales. Revenue fell 1.7% to $2.9 billion while earnings of 67 cents per share missed analysts’ estimates.
“Bed Bath & Beyond’s revenue and profit growth has been on a downward trajectory for some time,” Neil Saunders, managing director of GlobalData Retail, wrote in a client note, adding that most of its “are rather like well-organized flea markets and are neither the easiest nor the most inspirational places to shop.”
The company has cut 880 department and assistant store manager positions to focus on better customer service and accelerated the process of getting merchandise on the sales floor.
But S&P said that despite the “initiatives to improve profitability and merchandising, we expect promotional activities and costs related to the omni-channel platform to increase” as a result of competitive pressures.