BBBY - Bed Bath & Beyond Staves Off Bankruptcy At The Price Of Massive Dilution

Summary

• Ailing retailer surprises market participants with a Hail Mary capital raise effort which should provide the company additional time to restructure its cash-bleeding business.
• Last minute salvage comes at the price of massive dilution for common equity holders with outstanding shares anticipated to increase almost eightfold.
• Assuming full conversion and exercise of all warrants, the purchase price for a new common share calculates to approximately $1.33.
• Company updates on store closure plans and provides aggressive sales and EBITDA targets for FY2023.
• On a pro-forma basis, enterprise value is above multi-year peak levels reached in early 2021 on the back of strong pandemic-related tailwinds. While this doesn't make much sense from a fundamental perspective, the epic battle between meme stock traders and short-sellers is likely to continue for some time going forward.

After a stunning 90%+ rally on massive volume during Monday's regular session, shares of ailing retailer Bed Bath & Beyond ( BBBY ) reversed course in afterhours as investors digested news of a Hail Mary capital raise effort led by B. Riley Financial ( RILY ):

Bed Bath & Beyond Inc. (...) today announced a proposed underwritten public offering of (i) shares of the Company's Series A convertible preferred stock, (ii) warrants to purchase shares of Series A Convertible Preferred Stock and (iii) warrants to purchase the Company's common stock. (...) The Company expects to raise approximately $225 million of gross proceeds in the offering together with an additional approximately $800 million of gross proceeds through the issuance of securities requiring the holder thereof to exercise warrants to purchase shares of Series A Preferred Stock in future installments assuming certain condition are met. (...)

In aggregate, the company is looking for gross proceeds of $1.025 billion to be raised in multiple closings with the initial proceeds being used to repay outstanding revolving loans under the company's ABL Facility in exchange for lenders waiving existing defaults.

Bed Bath & Beyond will also make the recently missed $25 million interest payment on its senior notes.

The Company intends to use the net proceeds from the initial closing of the Offering, along with $100 million to be drawn under its amended and upsized FILO Facility, to repay outstanding revolving loans under its ABL Facility in accordance with the terms of an amendment to the Company's Credit Agreement waiving existing defaults thereunder to be entered concurrently with the initial closing of the Offering. Under the amendment, the Company will be required to use availability under its credit facilities to make the missed interest payment on its senior notes by March 3, 2023. Outstanding revolving loans repaid using net proceeds of the Offering may be reborrowed, subject to availability under the ABL Facility, and the Company expects to use those borrowings for general corporate purposes, including, but not limited to, rebalancing the Company's assortment and building back the Company's inventory. In addition, proceeds from the conversion of warrants to purchase shares of Series A Convertible Preferred Stock will be used to further repay outstanding amounts under the ABL Facility with 50% of such conversion amounts being applied against the borrowing base of the ABL Facility. Such repaid amounts may be reborrowed subject to availability under the ABL Facility.

As beggars can't be choosers, the last minute salvage comes at the price of massive dilution for the company's already badly stricken common equity holders:

Assuming full conversion and exercise of all warrants, the number of outstanding shares is about to increase by almost eightfold to 900 million.

Dividing the targeted $1.025 billion in gross proceeds by the approximately 783.2 million additional shares to be issued, the purchase price for a new common share would calculate to approximately $1.33, almost 80% below Monday's close.

Bed Bath & Beyond also appointed Holly Etlin from restructuring advisory firm AlixPartners as the company's Interim Chief Financial Officer and regained full compliance with Nasdaq's continued listing requirements following the filing of its quarterly report on form 10-Q on January 26.

Lastly, the company provided a number of targets and projections for 2023:

• Plans for current store fleet optimization program to be expanded to more than 400, including closure of an approximately 150 additional lower-producing Bed Bath & Beyond stores, which builds on closure of approximately 200 Bed Bath & Beyond stores and approximately 50 standalone Harmon stores in the U.S.
• Plans for FY2023 comparable sales in mid- to high-single digit range based on comparable sales down 30 percent to 40 percent in the fiscal first quarter and sequential, quarterly sales improvement thereafter.
• Plans for FY2023 Adjusted SG&A expense reduction of up to $1 billion, reflecting annualized cost optimization initiatives that began in fiscal 2022, as well as incremental cost reductions associated with additional store closures, as well as corporate and operating expense realignment to occur by early FY2023.
• Plans for FY2023 Adjusted EBITDA Margin in mid-single-digit range, based on achievement of aforementioned assumptions and reflecting negative Adjusted EBITDA Margins in the fiscal first quarter and a return to positive Adjusted EBITDA Margins beginning in the fiscal second quarter.

Suffice to say, expectations for full FY2023 comparable sales to increase in the mid- to high-single digits range look aggressive, particularly when considering an anticipated up to 40% yoy decline in Q1.

Bottom Line

In a surprise twist of fate, Bed Bath & Beyond manages to stave off a widely-expected near-term bankruptcy filing and gain more time to restructure operations with very substantial improvement projected for FY2023.

Not surprisingly, the lifeline comes at the expense of massive dilution for common shareholders but this still compares favorably to the likely wipe-out equity holders would have faced under chapter 11.

At the $3.85 after hours price, Bed Bath & Beyond's pro-forma enterprise value calculates to approximately $4.25 billion, well above the multi-year highs marked in early 2021 with the company being in a net cash position at that time amid strong pandemic-related tailwinds.

While this apparently doesn't make much sense, Meme stock land isn't exactly known for being prone to rational considerations.

That said, the company's new preferred equity holders will likely look to lock in some of their huge gains by shorting the common shares at current price levels, so the epic battle between meme stock traders and short-sellers might very well continue for some time going forward.

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