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Investment Thesis
Bed Bath & Beyond (NASDAQ:BBBY) has seen its shares jump 7% higher premarket as investors welcome its Q2 2022 results. However, I don’t see a lot of positives left here for shareholders.
Aside from the fact that the stock is down 70% in a little over a month and once more trading at single digits.
Investors are undoubtedly betting on a dead cat bounce. But that’s a really risky way to invest. I suggest that investors would do well to avoid this name.
The Writing Has Been on the Wall
Negative 26% comparable sales. Think about that. We are not one year into tough comps. We are now way beyond that. And how have investors reacted? At the time of writing the stock is up 7%! On the back of what? What are investors seeing that I’m missing?
I don’t want to be a bearish analyst. It’s not good for my karma. So let’s focus on something positive. BBBY has succeeded in shifting a lot of its inventory through aggressive clearances and it holds $1.5 billion of inventory on its balance sheet, that’s worth approximately 3x more than its current market cap. Even in a fire sale, that has some value.
Bed Bath & Beyond’s Financial Position, Not Looking Great
Presently, BBBY has $0.9 billion in liquidity. Also, BBBY has succeeded in selling three million shares in the open market and bringing in $30 million.
On the other side of its balance sheet, BBBY’s long-term debt increased from $1.4 billion at the end of last quarter to $1.7 billion at the end of August.
Also, keep in mind that BBBY has $300 million of its senior notes due in approximately 22 months. BBBY will be forced to get in front of that maturity at some point in the coming 6 or 7 months. It can’t wait to let the clock run down.
And given that refinancing those 3.8% bonds will become a very challenging feat to accomplish, in anything but the most restrictive terms, the bondholders are going to start to encircle BBBY.
There’s always a way out for a highly leveraged retailer facing a difficult time. But I don’t believe shareholders will welcome that event.
BBBY Stock Valuation – Really Difficult to Value
The reason why BBBY is a battleground stock is that it’s difficult to value. As we look out to 2023 are things going to get better or worse?
The only reasonable bullish argument that one can bring to the table is that the stock is cheap. But that same argument has persisted for a really long time. Ultimately, BBBY is cheap for a reason. But cheap doesn’t always equate to value.
A company that is valued at approximately $500 million market cap and is burning through $200 million in a quarter has a problem. A very serious problem. Even if the free cash flow burn slows down, they are going to burn through more than $700 million of free cash flow this year.
How does one, in all seriousness, even start to consider that as a valid investment thesis?
The Bottom Line
The work-from-home trend has fully unwound. The only thing left is to try to find a base to work from going forward. Along these lines BBBY states,
We are more focused than ever on demonstrating improvement in the coming quarters. Regaining market share and enhancing liquidity are our top priorities.
From this setup going forward, there are going to be companies that win market share, those that muddle through, and those that lose market share, to the myriad of competitors.
The only question left to solve is where exactly on the scale of muddling through and losing market share is BBBY? I want to root for this underdog. I would love to see this stock receive a short squeeze that rockets it to outer space. But I don’t believe that’s a realistic sustainable event. Not a rocket ship. Just a rock.
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