Back in late June, Bed Bath & Beyond (BBBY) posted a disastrous first-quarter report and fired its CEO, Mark Tritton. Its stock subsequently sank below $5 for the first time since the COVID crash in April 2020. But over the past month, its stock more than doubled to about $13. That rally wasn't driven by any meaningful improvements to its business. Instead, it was likely sparked by a short squeeze and exuberant discussions about the stock on Reddit's WallStreetBets (WSB) forum.

At the end of July, 36% of Bed Bath & Beyond's outstanding shares were still being shorted. The stock trades at just 0.2 times this year's sales after its month-long rally, which suggests that any positive news might drive it even higher. So should investors chase this wild rally?

A couple buys kitchenware in a store.

Image source: Getty Images.

Why did Bed Bath & Beyond's stock crash?

Prior to the pandemic, Bed Bath & Beyond struggled to stay relevant against Amazon, Walmart (WMT -0.18%), and Target (TGT 0.43%) in the crowded retail market. Its comparable sales growth stalled out, and its attempts to buy more growth through acquisitions made its business even messier. It also fell into the trap of using aggressive, margin-crushing discounts to generate more sales.

Bed Bath & Beyond's poor performance prompted a trio of activist investors to revolt in 2019, which led to a shakeup of its board of directors and the resignation of its CEO Steven Temares. It then hired Mark Tritton, Target's chief merchandising officer, as its new CEO to helm its turnaround efforts.

Tritton tried to fix Bed Bath & Beyond by shuttering its weaker stores, divesting its non-core banners, expanding its e-commerce ecosystem, and reducing its inventories with steep discounts. Unfortunately, Tritton took over just as the COVID-19 pandemic started, and its post-lockdown recovery was brief and quickly hampered by supply chain disruptions and inflationary headwinds over the past year.

Period

Q1 2022

Q4 2021

Q3 2021

Q2 2021

Q1 2021

Comps Growth (YOY)

(23%)

(12%)

(7%)

(1%)

86%

Adj. Gross Margin

23.8%

28.8%

35.9%

34%

34.9%

Data source: Bed Bath & Beyond. YOY = Year-over-year.

The company dismissed Tritton in June and named Sue Gove, an independent director on its board, as its interim CEO. On July 1, Gove bought 50,000 shares of Bed Bath & Beyond at an average price of $4.61 -- which nearly doubled her existing stake -- as a vote of confidence in its future.

Can Bed Bath & Beyond's stock recover?

During the company's shareholder meeting in mid-July, Gove said it was "working with urgency" and "very focused on finding the best opportunities available to maximize value for all stakeholders."

Gove highlighted the growth of its Simply Essential private label brand, the expansion of its new loyalty program (which launched on June 23 and gained two million members in the first two weeks), and fresh sales strategies for the back-to-school shopping season as potential near-term catalysts.

She said the company was still addressing its supply chain and inventory issues, and that the "next few weeks and months" would be "critically important" for its future. Gove also said the company would also provide "much more" information at an upcoming investor presentation in late August.

Gove's comments are realistic and hopeful, but they don't seem to justify the stock's massive rally over the past month. Meanwhile, its long-term debt -- which rose 17% year over year to $1.38 billion in the first quarter -- still raises concerns that it could become the next J.C. Penney or Sears. It only had $108 million in cash and equivalents at the end of May, and it's reportedly been seeking out private loans to stay solvent.

For now, analysts expect Bed Bath & Beyond's revenue to decline 17% to $6.5 billion for the full year and for its net loss to widen from $560 million to $665 million.

Ignore the "meme stock" noise

There's no fundamental reason to expect Bed Bath & Beyond's stock to recover over the next few quarters. Instead, investors seem completely fixated on the stock's short interest -- but that ratio might have already declined since its last official reading on July 28.

Therefore, investors expecting Bed Bath & Beyond to become the next GameStop or AMC will likely be disappointed when this meme stock rally fizzles out. It consistently underperformed Walmart, Target, and other big-box retailers during both the pandemic and the post-lockdown period, and there's no reason to believe it will suddenly get its act together before its liabilities overwhelm its assets.