The stock market was quiet early Tuesday morning, as investors seemed ready for a mixed opening on Wall Street. Futures on some stock indexes were down while others were up, but none made particularly large moves. Many market participants seemed content to wait for comments from Federal Reserve chair Jerome Powell, who will speak at a Washington gathering early this afternoon.
With few other distractions, the latest news from struggling Bed Bath & Beyond (BBBY +0.00%) got an inordinate amount of attention from investors Tuesday morning. The home goods retailer made a move to raise capital in a manner that raised some controversy, given the company's own comments about its financial situation. Bed Bath & Beyond's attempt to get cash from investors recalled memories of a failed effort from Hertz Global Holdings at a similarly troubled time in its past.
What Bed Bath & Beyond wants to do
Bed Bath & Beyond filed a prospectus with the U.S. Securities and Exchange Commission (SEC) late Monday, setting out its intent to do a stock offering to raise capital. A subsequent filing Tuesday morning gave further details, including an update that highlighted some of the special risks involved with the prospective offering.
OTC: BBBY
Key Data Points
Under the terms of the offering, Bed Bath & Beyond will offer convertible preferred stock and warrants to purchase additional preferred and common stock in sufficient quantities to raise $225 million in cash immediately. The company expects as much as $800 million in additional proceeds that would result from rights it has to force holders of its warrants to exercise them. Based on the preliminary prospectus filed with the SEC, such forced exercise provisions could potentially get triggered as soon as Feb. 27.
Bed Bath & Beyond made it clear that this was a last effort to raise needed capital. The prospectus states that if the offering doesn't happen, it expects it will likely file for bankruptcy protection and have its assets liquidated. It anticipates that shareholders won't receive anything in a bankruptcy scenario.
Shares of Bed Bath & Beyond had almost doubled on Monday, lifted by what most market watchers believed was a possible short squeeze. In premarket trading Tuesday morning, the stock gave back a sizable part of those gains, dropping 33%.
Will the offering work?
Bed Bath & Beyond's offering seems particularly brazen given that the retailer has already expressed substantial doubt about its ability to continue as a going concern. Yet what's really incongruous is the fact that shareholders have lifted the stock price to its best levels since September despite Bed Bath & Beyond's dire warnings.
The situation is eerily reminiscent of what happened with Hertz Global Holdings in mid-2020. At the time, Hertz had already filed for bankruptcy protection, but it had also achieved meme stock status, with investors bidding up shares substantially. Hertz felt compelled to try to raise money to meet creditors' claims by doing a stock offering in the middle of its bankruptcy proceeding. At the same time, Hertz made absolutely clear that it believed its stock would be worthless. The SEC thought so, too, and it stepped in to review the filing in a manner that led Hertz to withdraw the offering.
Steer clear
The key difference here is that Bed Bath & Beyond hasn't yet filed for bankruptcy protection. Yet it still defies reason to think that investors would be willing to bail out the home goods retailer without assurances that anything about its business model looks poised to improve.
Plenty of short-term traders are trying to take advantage of Bed Bath & Beyond's volatile stock movements. When the music stops, though, it's most likely that those holding the retailer's shares will be left with nothing.
