Wall Street, while hardly perfect, is almost always looking forward when it assigns a value to a stock. When a company like Bed Bath & Beyond (BBBY) sees a material stock price decline, it is usually because investors are worried that things are bad and likely to get worse.
In that way, the market is discounting the risk by lowering the share price. And yet, after a huge drop, there's still material risk at this home goods retailer you shouldn't ignore.
Massive pain
Putting some numbers on just how negative investors are about Bed Bath & Beyond is enlightening. Year to date in 2022, the stock is off by roughly 78%.
Image source: Getty Images.
That said, the retailer has managed to get caught up in the meme stock frenzy, so its shares have been pretty volatile. Tracking the decline from the highest price point of 2022 leads to a price decline of 88%. From the highest point over the past three years, meanwhile, the stock is down a whopping 94%. Those are very ugly numbers.
The unfortunate part of the story is that Bed Bath & Beyond's financial results justify a deeply negative mood. Looking at the income statement, revenue has declined since fiscal 2018, two years before the coronavirus pandemic led to non-essential business shutdowns in 2020.
And while one might have expected a generous revenue bounce back after those shutdowns, that hasn't materialized. In fact, same-store sales in the second quarter of fiscal 2022 fell a massive 26% year over year.
On the bottom line, the company has been bleeding red ink (losing money) since fiscal 2019. The losses have been fairly material as well, on a generally accepted accounting principles (GAAP) basis, noting that the fiscal second-quarter 2022 loss was a troubling $4.59 per share. The company is clearly struggling.
Can this be fixed?
Any investor who buys Bed Bath & Beyond today is hoping that the company can be turned around. And, to be fair, some of the bad news above is directly related to turnaround efforts. For example, management has been closing underperforming stores, which reduced revenues. However, there are still very material headwinds investors need to consider.
For example, because of write-offs and weak financial results, shareholder equity (or the accumulated profits of the company that haven't been paid out as dividends) has turned negative. That's not just a testament to the poor performance, but it also suggests that there will be nothing left over for shareholders in a bankruptcy situation. Even a low stock price doesn't solve for that risk.
BBBY Shareholders Equity (Quarterly) data by YCharts
The company's leverage, meanwhile, is elevated. Although one way to view the issue would be to look at the total debt load, a more telling issue right now is that Bed Bath & Beyond isn't covering its trailing-12-month interest expenses. Companies that can't support their debts often end up seeking out bankruptcy court protections.
Management is aware of the problem, noting that it recently sold stock at the current, deeply depressed stock price, so it could retire some debt and reduce leverage. That's something that a company only does when things are terrible, because share issuances like this are massively dilutive to current shareholders. And, in the end, Bed Bath & Beyond is really just buying itself more time to deal with the rest of the more than $1 billion in debt on its balance sheet.
In other words, the leverage problem hasn't been solved. It's just been kicked down the road a little.
Then there are the operational issues. The company has seen management turnover in its top ranks. It has been having a hard time getting products in its stores thanks to supply chain disruptions. It hasn't made good merchandising decisions, filling the store with products consumers didn't want. And it is dealing with dissident investors who want it to spin off or sell its best assets (the Buy Buy Baby nameplate) in order to save itself.
None of these issues are good, and all suggest that there is a lot more work to be done.
Too much risk
Sometimes, Wall Street pessimism gets the story wrong, but the dour mood today around Bed Bath & Beyond seems totally justified. And, worse, despite a massive stock price decline, there doesn't yet seem to be any silver lining in the well-formed clouds here. This is a high-risk turnaround play that only the most aggressive investors should be looking at (accepting that the end result could be a total loss of the cash invested).
That's not meant to suggest that management can't fix the company, but that likelihood seems very slim right now given all the problems and headwinds here.
