BBBY - Bed Bath & Beyond: A Very Troubling Offering

Summary

• Shares of retailer soar during day, fall after bell.
• Massive equity offering might not save company.
• Investors looking at tremendous potential dilution.

There likely will be books written in the future on the situation that's evolved with troubled retailer Bed Bath & Beyond ( BBBY ). For months now, the company has seemingly tried every which way to avoid bankruptcy, but the financial picture has only gotten worse. Shares of the company surged during Monday's trade, which resulted in a very interesting announcement after the bell that will certainly raise some eyebrows.

It was back in late October when I warned investors about the company's latest equity offering . At that time, a deal to raise up to $150 million was announced, as the company's results continued to worsen. Management was looking to shore up the balance sheet for a very important holiday sales period, but this was resulting in more and more dilution.

Back in January, the company announced results for its fiscal period ending in late November, and the numbers were terrible to say the least. Revenues plunged from the prior year period, missed estimates, and a much larger loss than expected was detailed. Over the past few weeks, we've heard more and more about efforts to avoid bankruptcy, such as numerous store closures and failed efforts to sell some key assets .

At the end of that November period, the company reported just $153 million of cash on its balance sheet, along with a little more than $21 million in long term investments. However, there was also over $900 million of debt due within 12 months, with another billion plus of long term debt. As the chart below shows, the company's cash balance over the last two years has gone from being slightly positive to heavily negative. Last week, the company failed to make an interest payment on one of its borrowings, putting the name in default and starting a 30-day grace period.

Shares of Bed Bath & Beyond have been very volatile in recent weeks as you might expect, and part of that is due to it being a heavily shorted name. On Monday, shares surged more than 92% to $5.86, while triggering multiple volatility halts during the session. After the bell, the company dropped news of a major potential equity offering , with the key details seen below:

The retailer expects to raise approximately $225M of gross proceeds in the offering together with an additional approximately $800M of gross proceeds through the issuance of securities requiring the holder to exercise warrants to purchase shares of Series A Preferred Stock in future installments assuming certain condition are met.

The company has warned that it will likely file for bankruptcy if the deal does not go through, and there is no guarantee that it will be completed. However, one must wonder if the retailer is still going to go bankrupt no matter what. Through the first nine months of the fiscal year, $890 million in cash was burned in operations, or nearly $100 million per month. On top of that, Bed Bath & Beyond spent over $322 million on capital expenditures.

We are now more than two months removed from the balance sheet that was shown in that 10-Q filing . The company could have easily burned through all of that cash, and it still has that roughly $2 billion of debt to deal with. While an offering of $1 billion would certainly help here, the move doesn't take away ongoing cash burn. Revenues are only going to plunge from past levels as more and more stores continue to close.

In a prospectus filed for the offering, management detailed that it could have 900 million shares outstanding if all of the preferred stock is converted, the warrants are exercised, etc. In late November, there were only 117 million shares of common stock outstanding. Thus, even if the company does survive, current investors are only going to own a fraction, perhaps a very small one, of the name moving forward.

In the after-hours session, Bed Bath & Beyond shares lost about a third of their value, trading below $4 a share. The market obviously realizes that this is a Hail Mary effort to avoid bankruptcy in the coming weeks. Even so, just getting this deal done in full will be hard to do, and a billion dollars doesn't fully solve the company's problems. In the end, this is not a name that investors should try to gamble on, as Monday's news could easily be a short term move to draw out the potential bankruptcy process a little longer.

For further details see: