Meme stock Bed Bath & Beyond (NASDAQ:BBBY) has been very volatile ever since the news of its possible bankruptcy came to the forefront. All the volatility and its fall in the past few months may leave investors confused about whether to buy the stock at such cheap levels. However, it is the high amount of short interest in BBBY stock that is taking the stock higher (a.k.a., a short squeeze) despite several risks facing the company. I believe that a Chapter 11 or perhaps Chapter 7 filing is around the corner for BBBY, and it is best to stay away from this high-risk stock.
Bed Bath & Beyond has been struggling to find a buyer for its loss-making businesses, given its shaky business fundamentals and balance sheet. It has $4.4 billion in total assets versus higher total liabilities at $5.2 billion with negative equity and about $1.02 billion in long-term debt. What’s more alarming is that cash has quickly depleted to $154 million (from $509 million a year ago). Further, on a trailing-12-month basis, free cash flow is -$1.05 billion. Therefore, liquidation looks like the only possibility for the stock.
Year-to-date, BBBY stock is up 44%. Let’s look at the chain of events that have unfolded and led to the roller coaster ride for the stock recently.
Recent Events Raise Multiple Red Flags
On January 5, BBBY stock tumbled around 30% after the company issued a business update, warning investors about the company’s “ability to continue as a going concern” based on its recurring losses as well as negative cash flows for the past three quarters.
Next, on January 10, Bed Bath & Beyond reported a much worse-than-feared fiscal Q3 loss of $3.65 per share. However, the stock recovered after earnings, based on some ray of hope from positive management commentary. Management expects a “second half commitment of $250 million in SG&A optimization, or $500 million in annualized savings”.
On January 19, the company received a notice from NASDAQ for non-compliance with its listing rule, as it failed to submit its 10-Q filing with the SEC within the stipulated time.
On January 26, the company stated in an SEC filing that it was in default on its loans and did not have enough cash to pay its outstanding debt. In addition, the company received a default notice from JPMorgan Chase (NYSE:JPM) on its main asset-backed loan facility worth $550 million. As a result, the stock tanked 22% on that day.
On January 27, S&P Global (NYSE:SPGI) Ratings downgraded Bed Bath’s issuer credit rating to “D” from “CC.” The downgrade implies that the company will experience a default and will need to restructure its debt.
Finally, on January 30, the company confirmed that it will close all its 50 Harmon beauty product stores. This is over and above the closure of its 87 flagship stores and the 150 store closures announced earlier. This also implies the layoffs of thousands of employees at BBBY. On the day of the announcement, the stock gained 12.6% thanks to the short squeeze that followed right after.
The Multi-Year Struggle for BBBY
For years, Bed Bath & Beyond was well known for its affordable merchandise that included home decor, kitchenware, and furniture. The stock peaked at an all-time high of over $80 in early 2014. However, it has been on a steady decline after that as it started facing the brunt of brutal competition from online retail giants like Amazon (NASDAQ:AMZN), and Walmart (NYSE:WMT) over the past few years.
Bed Bath & Beyond clearly failed to execute a successful transition to the online world and consistently lost market share to its lesser-priced online competitors. Store closures during the COVID-19 pandemic years added to its struggles. Its CEO Mark Tritton stepped down last year, raising investors’ concerns about the company’s future.
The company has been sailing in harsh waters for many quarters, reporting worse-than-expected losses for the past several quarters. While sales declined and losses escalated, its debt also grew enormously.
Is BBBY Stock a Buy, Sell, or Hold?
Given the imminent bankruptcy of BBBY, the stock has received six Sell recommendations for a Strong Sell consensus rating. BBBY stock’s average price forecast of $1.36 implies a 59.2% downside potential.
Conclusion: Stay Away from This High-Risk Stock
There are too many red flags suggesting that there is no way Bed Bath & Beyond can save itself from bankruptcy. While talks are going on with potential buyers to chalk out a strategic alternative plan, there are no reports of any interested buyers so far.
Given the current scenario, bankruptcy for Bed Bath & Beyond stock is imminent, with very little likelihood of value recovery for shareholders. Likewise, I think the Bed Bath & Beyond stock is highly speculative, making me stay away from the stock.