Bed Bath & Beyond Inc. (NASDAQ: BBBY) is one of the leading US retailers specializing in offering home items. While the company was one of the most successful in the US, BBBY finds itself trying to combat financial woes as it faces increasing competition from online retailers who have the capacity to offer similar products at much lower prices. At the same time, BBBY’s previous regime’s attempts to grow the business have backfired – leading the company to carry substantial amounts of debt. With the company struggling financially, a bankruptcy could be looming if BBBY’s turnaround plan does not provide the wanted results. For these reasons, I believe BBBY stock forecast is bearish and I would sell the stock as the risk accompanied with the stock far out gains any potential reward.
BBBY caught investors by surprise last summer following its impressive run from $5 to $31 thanks to a reddit short squeeze. However, this run was short-lived as BBBY stock gave up all of its gains after activist investors and GME’s chairman Ryan Cohen sold his entire stake in the company. Now that this saga is over, BBBY stock finds itself trading near the $2 mark with an ambiguous future awaiting the company. With growing competition and a failing business model, BBBY stock forecast could not be any worse as the company could be heading to a bankruptcy in 2023.
Ever since the pandemic impacted supply chains, BBBY stock has been trending downwards as the pandemic left the company in financial turmoil. This downward trajectory could be noticed prior to the pandemic when BBBY decided to replace national brands with private-label goods under its previous management. However, this strategy alienated BBBY’s shoppers – leading the company to lose a substantial portion of its market share. In this way, BBBY has been witnessing accelerating losses and mounting debt. Despite these yellow flags, BBBY’s previous management continued to move forward with costly share buybacks which have increased the pressure on the failing retailer leading to its spiral downfall to its current PPS.
Now with a new management in place under the leadership of Sue Gove, BBBY has been undergoing a business turnaround plan. Through this plan, BBBY is working to deal with its debt situation by embracing a back-to-basics strategy that intends to drive growth to the company’s business. One of the main pillars of this strategy is BBBY pivoting back to national brands instead of private labels. For this reason, BBBY decided to discontinue three of its own labels – Haven, Wild Sage, and Studio 3B – while reducing its investment in its remaining six labels by 20 percent. At the same time, BBBY is working to increase its national brands inventory to 20%.
While this plan theoretically could help BBBY’s operations rebound, I believe this strategy would fail since customers have already lost interest in BBBY’s offerings following its failed strategy under the previous regime. The reason for this belief is that it is usually hard for retailers to attract their core customer base again after losing them as was the case with fallen giants Sears and JCPenney.
Additionally, pivoting back to national brands at a time where the company is looking to raise cash to continue operating could prove to be costly to the company’s future prospects. With this in mind, BBBY’s vendors are already worried about the company’s financial state and have demanded guarantees from the company to make its payments on time after previously falling behind on payments. Based on this, national brands could ask BBBY to pay for their products in advance to mitigate the risk of the company failing to pay for the deliveries.
Considering that interest in BBBY’s offerings is declining, the company’s bet on having a successful holiday season appears to have lost as the company had to offer its products at steep discounts to raise cash. However, this attempt also appears to have failed as traffic to BBBY’s website in November was down 19%. Moreover, traffic was down 25% from Thanksgiving to Cyber Monday which should be a profitable period for retailers. Since the company should have shown better results considering the steep discounts to clear unsold inventory, I expect BBBY to report further decline in sales in its upcoming Q3 earnings – set to be released on January 10. In light of this, BBBY’s efforts to turnaround its business may prove their failure as the situation is beyond repair in my opinion.
Meanwhile, the current macroeconomic environment of rising interest rates and a declining home market would also further impact BBBY negatively. As a result, BBBY’s only hope for 2023 is a strong registry year. However, wedding registries have been shifting more to Walmart, Target, and Amazon as they offer cheaper prices and sometimes better products. Although the company’s management has been actively attempting to improve the company’s business, I believe these efforts might be delaying the inevitable for BBBY which is bankruptcy.
Since the company’s liquidity position is extremely weak, BBBY has had to dilute its shareholders to raise capital and increased its ATM offering by $150 million after initially raising $75 million in late August through the sale of 12 million shares. Currently, BBBY has an OS of 116.6 million compared to 80.3 million at the end of August. Despite this dilution, the ATM programs have not shown much success as the company sold nearly 22 million shares. Considering the stock’s beaten down price, the ATM programs appear to have minimal impact on the company’s financials. In light of this, I believe BBBY stock is on track to further drop to new lows unless a major catalyst occurs. Until then, BBBY stock forecast remains bearish in my opinion in 2023.
Debt Exchange Offer
Now onto the company’s debt situation, BBBY commenced a debt exchange offer last October to deal with this urgent situation to address the maturity of its near-term 2024 notes. Through this offer, BBBY is looking to exchange its senior notes as follows:
3.749% Senior Notes due 2024 for new 3.693% senior second lien secured non-convertible notes due 2027 or new 8.821% senior second lien secured convertible notes due 2027 at the option of the note holders.
4.915% Senior Notes due 2034 for new 12% senior third lien secured convertible notes due 2029.
5.165% Senior Notes due 2044 for new third lien convertible notes.
If this offer is successful, BBBY would be able to focus on implementing its turnaround plan as it would be able to address its debt at a later date. However, bondholders appear to be reluctant to tender the company’s offer as the terms are non attractive for most of the noteholders. As a result, BBBY has been constantly extending the deadline for the exchange offers – with the most recent extension set to expire on January 4th. On that note, I expect BBBY to further extend the deadline as the current returns are underwhelming.
As of December 19, BBBY’s exchange offer resulted in $39.2 million from the 2024 notes being tendered in addition to $51.9 million from the 2034 notes and $67.7 million from the 2044 notes being tendered. However, these tendered notes only represent 18.2%, 24.7%, and 11.1% respectively of the principal amount of each note. Based on this, I do not expect BBBY’s exchange offer to become successful unless the company improves the exchange terms so that these notes become more attractive for investors.
BBBY Stock Forecast
With declining sales, weak store traffic, low cash levels, and outdated inventory, BBBY finds itself facing the risk of bankruptcy if the management’s turnaround plan does not bear its fruit. On that note, I believe the company’s plan might not be successful considering the company’s failure in its debt exchange offer. However, I would be watching for an update regarding the offer which has expired on January 4. If the offer is further extended as I expect, BBBY would have to improve the exchange terms which would add pressure to the company’s balance sheet when these notes reach maturity.
Another thing to watch is BBBY’s upcoming Q3 earnings on January 10 which would provide insights on the company’s future. With this in mind, I expect BBBY to report underwhelming earnings following its disappointing holiday season. Although the company’s management appears to be committed to turning around the business, I believe BBBY stock forecast is bearish as the company could be heading to bankruptcy in 2023.
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