Bed Bath and Beyond: Capital Structure Decision (HBR Case Study)

1592 Words Mar 25th, 2014 7 Pages
Bed Bath & Beyond (BBBY) was founded in 1971 by Warren Eisenberg and Leonard
Feinstein. BBBY held its initial public offering in June 1992, on the NASDAQ exchange. The company utilizes the “big box” retail concept and focuses its product offerings around domestics merchandise and home furnishings. Since its IPO BBBY has been favored by equity investors and long considered one of the best performing retail companies. They have never missed an earnings estimate and have experienced a fortyfold increase in stock price from the original $17 per share IPO.
The company introduced its first superstore in 1985 and have since underwent large scale expansion operating 575 stores by the end of the fiscal year 2003. BBBY also
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In 2003 10-K, BBBY management confirmed its commitment to ongoing expansion and stated its intention to use internally generated funds to finance its expansion, which clearly implies pecking order theory is rooted in BBBY capital structure, and is the reason why BBBY keeps a large cash position (Artur
Raviv, 2007).

Agency Theory & Costs
Keeping a large sum of money on hand may be advantageous in uncertain economic conditions, and financial crises. However, this can lead to potential conflict between managers who do not act in the interest of shareholders, such as empire building and over-investment problems. Debt helps discipline management because they must pay interest payments or risk bankrupting of the firm. It also helps reduce

Case 2: Bed Bath & Beyond

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wasteful investments as manager have less cash on hand to invest, in other words managers must be careful how they use the money of the firm. Debt creates a conflict of interest between the shareholders and creditors though, such as the possibility of expropriating wealth from creditors to shareholders and the underinvestment problem so this must be monitored.

The Cost of Financial Distress & Debt
BBBYʼs current cost of financial distress is essentially zero because they have no debt on their books. The

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