Lately, it appears that Bed Bath & Beyond (NASDAQ:BBBY) has been following the playbook of many distressed publicly listed businesses. The company is seeking to enact a reverse split of BBBY stock. Furthermore, Bed Bath & Beyond is still pursuing its equity offering agreement even though the company’s shares are rapidly losing value. These measures are signs of desperation, and they don’t bode well for Bed Bath & Beyond.
Bed Bath & Beyond’s shareholders are in a tight spot. The company’s shares lost 50% of their value in February. Yet, some habitual dip-buyers are holding on, hoping for a near-term turnaround.
Always remember, hope isn’t a viable strategy in the financial markets. Bed Bath & Beyond might not be able to stave off bankruptcy for much longer. Consequently, there’s a strong case for short-selling the stock, or at least choosing not to own it.
Bed Bath & Beyond Continues to Pursue a Share and Warrant Sale
Apparently, there’s a hedge fund out there that still believes in Bed Bath & Beyond. In particular, Hudson Bay Capital Management has reportedly invested hundreds of millions of dollars into Bed Bath & Beyond.
However, according to the Wall Street Journal, part of the deal was that BBBY stock can’t fall below the $1.25 threshold. Bed Bath & Beyond recently announced that this “Price Failure threshold” has been lowered to $1 until April 3.
The Bed Bath & Beyond already dropped below the $1 “Price Failure” level during the after-market hours of March 17. So, the Hudson Bay deal is on shaky ground.
Besides, current shareholders should wonder whether issuing hundreds of millions of dollars worth of shares and warrants is a value-added strategy. After all, putting more shares into circulation could have a dilutive effect, which might not sit well with Bed Bath & Beyond’s current investors.
A Reverse BBBY Stock Split May Be Coming Soon
Going back to the desperate-measures playbook, Bed Bath & Beyond loudly and proudly announced that it’s seeking shareholder approval for a reverse stock split. I’ll admit, this could get BBBY stock above the “Price Failure” threshold for a while.
According to the press release, it will be a “1-for-5 to 1-for-10” stock split if the shareholders approve it in an upcoming meeting. Would this actually enhance the value of Bed Bath & Beyond’s shares, though?
Bed Bath & Beyond President and CEO Sue Gove almost seems to imply that the proposed reverse stock split would cure the company’s financial problems. It would “enable us to continue rebuilding liquidity to execute our turnaround plans and better position the Company financially,” Sue Gove assures.
At the same time, Bed Bath & Beyond acknowledged that the reverse stock split wouldn’t have any effect on the company’s “actual or intrinsic value of our business.” Moreover, it “would have no impact on the Company’s business operations or any of its outstanding indebtedness.”
And, that “outstanding indebtedness” is considerable. Bed Bath & Beyond’s most recently filed Form 10-Q indicates $1.03 billion of long-term debt and $5.2 billion worth of long-term liabilities. Sure, Bed Bath & Beyond may have paid off some of the interest on its debt. Still, there’s a lot of debt and interest still to be paid, and Bed Bath & Beyond is a woefully unprofitable business.
Is it Time to Short BBBY Stock?
Short-selling is only really meant for highly sophisticated and well-capitalized financial traders. Hence, most people shouldn’t short BBBY stock.
However, the case for short-selling shares of Bed Bath & Beyond is evident. The company is in terrible financial shape and may be headed for bankruptcy. Additionally, Bed Bath & Beyond’s proposed reverse share split is an unmistakable sign of desperation.
Due to the inherent risks, you don’t have to try short-selling BBBY stock if you don’t want to. At the very least, however, it makes sense to completely refrain from investing in Bed Bath & Beyond.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.