This week has been another dismal one for shareholders in embattled retailer Bed Bath & Beyond (NASDAQ:BBBY). Despite trading as high as $4 per share on Monday, BBBY stock has since sunk to the $3.20 level. This underperformance follows some disappointing news around the company’s latest restructuring efforts.
As InvestorPlace reported yesterday, the company recently extended its deadline for its convertible debt exchange from Dec. 5 to Dec. 19. Essentially, what the company is trying to do is restructure its balance sheet, issuing equity (shares) to offload some of its debt.
As it turns out, investor appetite for this offering is limited. Existing shareholders will experience dilution from such a deal — leading to a lower price per share — and existing bondholders will forego their more senior rights in the event of a bankruptcy. Thus, as bankruptcy risk increases with Bed Bath & Beyond, debt holders appear to be stuck in a no-win position.
Let’s dive more into what this offering means and why shares of BBBY stock continue to slip on the news.
Why Is BBBY Stock Continuing Lower?
This convertible debt offering isn’t some sort of sneaky maneuver. Plenty of companies with overburdened balance sheets attempt such moves in difficult times. However, the signal the offering sends to shareholders is one that most don’t seem to like right now.
For one, debt holders who agree to convert their debt to equity stand to dilute existing shareholders. In anticipation of this, shareholders are selling while the price remains (relatively) high, creating a self-fulfilling prophecy. Thus, existing bondholders have less incentive to convert their debt to equity that’s eroding in value.
That said, there are notable benefits to this conversion for the company. If Bed Bath & Beyond can free up room on its balance sheet, it may be able to make it through this holiday season in decent shape. Currently, it’s running into trouble, with sales hurting due to out-of-stock items that are tied to suppliers holding back shipments. If the company can turn around this downward spiral by convincing suppliers the company is good for it, it may be able to survive.
However, that could also be too rosy of an outlook. The company is in trouble and all indications are that this holiday season may be the worst in some time. Bed Bath & Beyond is cutting costs everywhere and trying to keep its head above water. In the retail world, that generally doesn’t bode well.
Thus, the selloff in BBBY stock will likely continue in the absence of any good news. Despite previous retail investor interest, this stock doesn’t have the fundamentals to support another rally. That doesn’t mean another rally won’t materialize — anything is possible. But I’m still staying far away from shares.
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On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.
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