BBBY - Bed Bath & Beyond: The Market Has Lost Its Mind

Summary

• Bed Bath & Beyond once again trades at exuberant levels.
• The recent offering could not only kill the ongoing stock momentum but also postpone the company’s bankruptcy at the same time.
• In the long term, Bed Bath & Beyond is likely to nevertheless file for bankruptcy.

Bed Bath & Beyond ( BBBY ) has become another meme stock since the company is on the verge of bankruptcy with no real way to improve the business and yet its shares managed to appreciate by over 300% in the last month as retail traders made one last ditch effort to squeeze short sellers. However, after the company announced a new stock offering right after the market closed on Monday, there's a possibility that the momentum is going to be short-lived due to the major dilution that comes with such an offering. Even if the offering is going to be fully completed it's still hard to imagine how the business would avoid bankruptcy due to the number of challenges that it faces.

The Story So Far

Problems at Bed Bath & Beyond began a long time ago and only accumulated in recent months. In the latest Q3 earnings report for the quarter that ended on November 30, which was released with the delay this January, the company revealed that its sales have declined by 33% Y/Y to $1.26 billion while its net loss stood at $393 million against a net loss of $276 million a year ago. On top of that, the company's cash reserves decreased from $509 million a year ago to only $154 million at the end of November 2022. While its total liquidity at the end of November was around $500 million thanks to the FILO loan and the Asset Based Lending facility, Bed Bath & Beyond is still unlikely to execute a turnaround due to close to $2 billion in long-term debt, lack of inventory and negative cash flow from operations.

As such, talks about the liquidity crunch began to take place in recent months since there was a risk that the company will fail to honor its obligations due to the lack of resources. At the beginning of January, Bloomberg reported that the company is looking for lenders that would be able to finance it during the bankruptcy proceedings. After failing to find anyone meaningful, the management noted two weeks ago that it doesn't have the resources to repay the amounts needed under its credit facilities which led to receiving a default notice from JPMorgan ( JPM ).

Last Wednesday, Bed Bath & Beyond failed to pay ~$28 million in interest payments on its long-term debt and as a result, entered a 30-day grace period as it was preparing to seek bankruptcy protection. However, an unexpected event has occurred which could prevent the company from announcing bankruptcy in the following days.

Meme Traders Strike Back

While everyone was expecting the bankruptcy filing to come out at any time, Bed Bath & Beyond's stock once again managed to appreciate to exuberant levels on Monday rising from around $3.11 per share at the opening to as high as $7 per share at one time and closing close to $6 per share at the end of the trading session.

All of this was possible thanks to the inflow of retail traders who began to acquire the stock en masse which led to a short squeeze similar to the one that happened last August when the share price appreciated from ~$6 per share to ~$23 per share in a matter of a couple of weeks before depreciating. It's easy to explain such interest to this particular stock. Back in August, there was a 103% short interest in Bed Bath & Beyond stock which attracted retail traders who managed to make a quick profit by squeezing the short sellers who were overexposed to the stock. Now there's a similar thing happening but the only different thing is that the current short interest in Bed Bath & Beyond stock is 46%.

However, in addition to the relatively high short interest, the comeback of crypto coupled with dovish remarks of the Fed chairman Jerome Powell who began to talk about the beginning of the disinflationary process made it possible for the stock of the insolvent business such as Bed Bath & Beyond to nevertheless reach exuberant levels.

The problem though is that if back in August the block sale of shares by a famous investor Ryan Cohen led to the overall depreciation of Bed Bath & Beyond shares then now it's the actions of the company's management itself that could kill the ongoing momentum.

Right after the market closed on Monday, the company released a new filing in which it announced the issuance of Series A convertible preferred stock s and warrants to raise over $1 billion. There's no guarantee that it will be able to raise the full amount but by giving the ability to sell those assets at attractive prices it could nevertheless find buyers. At the same time, the company noted that it plans to use the proceeds from this offering to repay the missed interest payment on its senior notes by March 3 which should technically help it to exit the grace period and at the very least postpone its bankruptcy.

The problem with this offering is that it extremely dilutes its current shareholders which could kill the overall momentum that the company's stock had so far. As the recent filing noted:

The issuance of the securities in this offering will significantly dilute the ownership interest of the existing holders of our common stock , and the market price of our common stock will likely decline significantly as a result of sales of such securities into the public market by investors in this offering and subsequent investors or the perception that such sales may occur.

What's Next?

The fact that Bed Bath & Beyond stock is likely to be extremely diluted doesn't mean that there's no possibility that it won't appreciate further. In the past, companies like AMC ( AMC ) have been diluting their shareholders to repay their debts and it didn't stop the stock from further appreciating before finally depreciating as the macro environment changed.

Considering that Bed Bath & Beyond has become a battleground stock as well, I won't take off the possibility of a further appreciation as underestimating the market's stupidity is one of the biggest mistakes one can make.

However, over the longer term, it's safe to assume that the company would nevertheless go under. Even if the management manages to fully get the needed amount from the offering, the proceeds would nevertheless go to repay the existing debt which would leave little liquidity to transform the business. Considering that Q1 has historically been the worst quarter for the business, it's hard to imagine how the management would be able to improve the situation given the disastrous performance in the past.

At the same time, at the current cash burn rate the company would likely be required to raise additional funds along the way which could lead to an additional dilution and a lack of returns for average investors as the risks of bankruptcy won't subside as well. As the management has noted in the latest filing:

Trading in our securities is highly speculative, and we may be required to file for bankruptcy protection even if the Transactions are fully consummated.

Therefore, I decided to avoid the stock whatsoever as the new offering has the potential to kill the ongoing momentum while the potential bankruptcy would more than likely lead to a full loss of the investment as common shareholders are unlikely to receive anything during the bankruptcy procedure.

For further details see: