Bed Bath & Beyond (NASDAQ:BBBY) may have made some wild, “to the moon” moves in the past, but the days of speculative frenzy for BBBY stock are over, and are unlikely to return.
With the moribund retailer’s announcement of a plan to stave off bankruptcy, through a dilutive capital raise, its fate is largely sealed. The company is raising the funds from Hudson Bay Capital Management, an institutional investor.
Not only is this deal very unfavorable to existing shareholders, it may not be complete. If that happens, the company will again need to scramble in order to keep the lights on. With this, “wipeout risk” remains high for BBBY.
Even if they secure financing, it’s questionable whether this will lead to a turnaround. Given these bleak prospects, one thing is clear. While shares trade at low single-digit price levels, they are far from a bargain.
| BBBY | Bed Bath & Beyond | $1.32 |
BBBY Stock and its Last Big Hurrah
Already on shaky ground before the onset of the pandemic in 2020, the past few years have been challenging for Bed Bath & Beyond’s underlying business.
First, the 2020 lockdowns had a negative impact on sales, and severely affected its profitability. Then, in 2021 and 2022, despite the post-lockdown “reopening,” store traffic failed to rebound.
To make matters worse, high inflation and the supply chain crisis placed a further squeeze on its margins, which have resulted in the company’s current distressed financial state.
Yet while the retailer’s fundamentals deteriorated over this period, it’s not as if BBBY stock went on a steady slide during this time frame. Sure, shares dipped during 2020. During the “meme stock” craze of 2021, though, shares hit multi-year highs thanks to a series of rumors regarding a possible short squeeze and an activist investor’s brief involvement with the stock.
Even after hope and hype faded, and fundamentals came back into focus, with shares tumbling down to penny stock price levels, BBBY experienced another big spike on Feb. 6, immediately prior to the capital raise news. However, this was likely the stock’s last big hurrah.
Heads You Lose a Lot, Tails You Lose it All
Over the past few weeks, traders have abandoned past delusions about BBBY stock. Although not for certain, perhaps it’s because these speculators have wised-up, and realized that BBBY is a “heads you lose a lot, tails you lose it all situation.”
What do I mean? The above-mentioned Hudson Bay deal will, best-case scenario, apply additional pressure to the stock. In this transaction, Hudson Bay is providing Bed Bath & Beyond with cash (first $225 million, then possibly as much as $800 million).
The institutional investor will receive preferred stock that they can convert into new common shares at a discount. Hudson Bay can then resell these shares, locking in profits. Worse case scenario, this deal wont provide the company with sufficient financing with shareholders taking a total loss.
How? As InvestorPlace’s Samuel O’Brient recently reported, if BBBY’s share price falls low enough, Hudson Bay may decide not to provide the additional funding. If this happens, Bed Bath & Beyond, if it cannot find another deep-pocketed buyer, or cannot attract retail buyers for a secondary offering, it may have to finally capitulate and file for Chapter 11.
Bottom Line
You may think that it’s not definite that Hudson Bay backs out midway. You may also believe that, despite the prospect of heavy shareholder dilution from this deal, if it facilitates the company becoming profitable again, the resultant boost to its underlying valuation enables BBBY to bounce back.
However, based on the circumstances, I just don’t see this happening. It’s questionable whether closing 150 more of its locations will have as much of an impact as the company expects it will.
Furthermore, between big box and e-commerce competition, as well as the alienation of its suppliers, store performance could continue to deteriorate.
Any way you slice it, BBBY stock appears destined to head even lower, with little chance of it surging higher. This makes it a stock to avoid.
BBBY stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.