Home Deep Analysis Bed Baths and Beyond Stocks: Burning Money, What to Know

Bed Baths and Beyond Stocks: Burning Money, What to Know

by WOOWinvest
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Bed Baths and Beyond Stocks: Burning Money, What to Know

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investment thesis

Bed bath and others (NASDAQ: BBBY) sold off after its first-quarter 2022 results, and the stock has returned to Covid lows below $5 per share.

Highly Shorted Stocks After the company grossly mishandled its capital allocations, it continued to provide naysayers with plenty of ammunition.

In short, it’s a flawed business model. If this stock has any upside, it will only come from the occasional bear squeeze. There is little value here.

Revenue growth remains negative

BBBY revenue growth rate

BBBY revenue growth rate

Last week, BBBY reported another set of encouraging results. The company reported negative 25% revenue and negative 23% comparable sales.

Meanwhile, BBBY believes sequential comparable sales should be seen in the second half of fiscal 2022. If the business is expected to decline from negative 25% and BBBY still expects comparable growth of 10% to 15%, that only says one thing. A very flawed business model.

I believe management probably knows this. Or should I say, management should know this. However, that didn’t stop the massive funding from adding fuel to the fire.

capital allocation fiasco

Over the past twelve months, BBBY has repurchased more than $500 million worth of stock. In fact, BBBY not only repurchased $589 million in fiscal 2021, but also repurchased another $43 million worth of stock in the first quarter of fiscal 2022.

As you know, these buybacks amount to precious money flowing out at a very wrong time. Not only are these stocks clearly not adding value to long-term shareholders, but more importantly, the outflow of capital exceeds the company’s total market capitalization.

This is obviously not the optimal capital allocation strategy.

Now, to add insult to injury, recall that in the fourth quarter of 2021, it had a net cash position of $150 million. What about recently? The latest BBBY results show a business has a net debt position of about $1.3 billion.

The business is now very over-leveraged.

BBBY stock valuation: difficult to value

As noted in the section above, BBBY has approximately $1.3 billion in net debt on its balance sheet. Think a little bit about this. Not only is its outstanding debt greater than BBBY’s market cap, I’m having a hard time finding a way to unlock shareholder value right now.

This time last year, when stocks were more expensive, I really believed there was value in BBBY. Your business model reports breakeven cash flow and has a strong balance sheet and ample cash. Yes, I was wrong to think so. But unfortunately, that’s what I thought.

Today, you’re looking at a business that is burning through cash rapidly and has very little cash on its balance sheet.

bottom line

Shares of Bed Bath & Beyond were sold short by about 30%. This means there may be a brief squeeze during the process.

But when I look at and consider the outlook for a business reporting negative comparable sales growth and gross margin declines of 1,100 basis points, it’s hard for me to find any meaningful upside, if any, in this stock.

The next catalyst for stocks? BBBY has approximately $285 million in debt due on August 1, 2024. At this point, management will have to work very hard to get ahead of this debt stack.

Given that BBBY has no realistic way to repay its outstanding debts when they come due, refinancing these debts will be entirely at the mercy of creditors.

Therefore, the question is not whether this debt will be paid or carried forward. It’s just a question, what kind of coupons will the new notes carry? Any rate of around 8% would make it clear to all stakeholders that the business is slowly being put on hold.

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