BBBY stock: Is Bed Bath & Beyond heading for bankruptcy?

Bed Bath & Beyond sinks deeper into the red

Bed Bath & Beyond has found itself in stuck in a cycle of decline for years. The company’s weaker financial footing has made suppliers more wary, prompting them to ask for quicker payments from while cutting their credit lines. That, plus a botched plan that replaced big name brands with private label goods, has made it harder to fill the shelves and reduced the appeal to consumers, hurting footfall and sales. That makes it harder for the company to pay its suppliers and build inventory, which only exacerbates the problems further. That was the basis for the management shake-up last year that saw former CEO Mark Tritton leave last year, leading to a string of high-profile exits and leaving CEO Sue Gove and her new board with a slew of issues that they are still trying to address.

As a result, net sales plunged 33% from last year in the third quarter to $1.26 billion, with like-for-like sales falling 32% as it struggled to attract footfall to its stores thanks to the lack of inventory needed to woo shoppers through its doors. The drop in like-for-likes was driven by a 32% drop from its core retail brand as both in-store and online sales suffered, as well as a drop in the low-twenties percentage at its buybuyBABY brand.

The company did show progress in cutting costs considering selling, general and administrative (SG&A) expenses dipped to $583.6 million in the period from $698.0 million the year before after cutting jobs, closing stores and reducing overheads.

However, that was not enough to rescue the bottom-line. The troubled homeware retailer had warned shareholders last week that it would report a net loss of $385.8 million in the third quarter, but this came in slightly wider at just under $393.0 million. That compared to the $276.4 million loss booked the year before and the $366.0 million loss booked in the second quarter. The wider loss was driven by the drop in sales and some $100.7 million worth of impairments against assets in its stores.

Is Bed Bath & Beyond heading for bankruptcy?

Bed Bath & Beyond warned last week it is evaluating a number of options, including ‘obtaining relief under the US Bankruptcy Code’, and warned that ‘there is substantial doubt about the company's ability to continue as a going concern’.

We discovered that the company burnt through $307.6 million worth of operating cashflow in the third quarter. That has left Bed Bath & Beyond with around $200 million in cash and total liquidity of around $500 million when its borrowing facilities are included. Understandably, there will be concerns considering it is burning through significant levels of cash and its balance is dwindling. At this rate, Bed Bath & Beyond could see liquidity exhausted within the next one to two quarters unless it sources new funding or somehow stems the bleed.

With this in mind, the company said it is on track to cut SG&A costs by $250 million in the second half of the financial year versus the year before and on course to close 150 stores by the end of fiscal 2022. It said it has identified an additional $80 million to $100 million of potential savings opportunities across its supply chain. This will include more job cuts. While that should reduce the cost burden and ease its cash burn, it won’t be enough on its own to allow Bed Bath & Beyond to avoid bankruptcy.

Bed Bath & Beyond considering all options

Bed Bath & Beyond refused to take questions from investors in the post-earnings conference call and instead focused on reiterating that it will do whatever it takes to try to turn the business around.

‘As we shared last week, we continue to work with advisors as we consider all strategic alternatives to accomplish our near- and long-term goals.  We have a team, internally and externally, with proven experience helping companies successfully navigate complex situations and become stronger.  Multiple paths are being explored and we are determining our next steps thoroughly, and in a timely manner,’ said CEO Sue Gove in the statement.

The options available include restructuring the business, refinancing its debt, raising fresh debt or equity, cutting costs, and/or selling assets. Another priority is improving inventory levels to ensure it has the products customers want and need, and this has improved since the last quarter.

Clock is ticking for Bed Bath & Beyond

The clock is ticking and Bed Bath & Beyond will have to find a solution quickly, or at least some breathing space if it is to avoid collapse. Both the Wall Street Journal and Dow Jones have cited unnamed sources that claim it is already in the early stages of planning for bankruptcy, although other sources have claimed it could avoid this by securing fresh financing.

Existing investors would be most likely to inject any fresh funding considering they have a stake in the company’s future. However, it is worth flagging that media reports said Bed Bath & Beyond recently failed to secure enough support from its creditors to complete a bond-swap offering that was designed to give it more time to turn its fortunes around, suggesting not all the paths it is exploring are proving fruitful. Meanwhile, raising equity could be even more challenging considering the collapse in its share price - and investors could be significantly diluted should it go down this avenue.

Where next for BBBY stock?

Meme stocks are renowned for being volatile and reacting against what the fundamentals are showing us, and Bed Bath & Beyond is fitting this bill today. The stock is up over 33% in early trade, allowing it to recover some of the ground lost since it issued it is considering filing for bankruptcy last week that sent the stock to its lowest level since the early 1990s.

That low of $1.27 is still in play and investors will hope this will provide a new level of support going forward, supported by the fact the RSI plunged deep into oversold territory.

Still, the stock has tested the falling trendline that can be traced back to early October and this could provide some resistance. It needs to break above here in order to return to levels seen before the warning of potential bankruptcy. If it can achieve that, then it can attempt to recapture the 50-day moving average, currently at $3.17, for the first time in almost four months and then target $4.40, marking the level of support seen both in April 2020 and July 2022.

Unsurprisingly, brokers have become more pessimistic over the past week, especially KeyBanc that slashed its target price to just $0.10 from $2.00. Meanwhile, UBS cut its price target to $1.50 from $3.50 as BofA Global Research lowered its view to $1.60 from $2.00. The average rating among the 13 brokers that cover the stock, according to Refinitiv, is Sell with an average target price of $2.62.

Bed Bath & Beyond shares are likely to remain highly volatile. Some retail traders and others are busy speculating whether it can survive the storm in the hope of a payout in the future as others sell the stock due to the poor fundamentals.

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