Bed Bath & Beyond (BBBY) Stock: Major Short Squeeze Potential

Struggling home-decor chain Bed Bath & Beyond (NASDAQ:BBBY) saw its share price collapse by 49% on Tuesday after the company announced the successful completion of a $1.0B equity offering. Bed Bath & Beyond also announced a new round of store closures in a bid to lower its cash burn and focus on its restructuring. I believe the market is overreacting to the equity offering and, considering that the retailer is the second-most shorted stock on Wall Street with a short interest ratio of 47%, I believe there is the possibility of another major short squeeze. BBBY, however, is a very high risk stock and investors should be aware that they could lose all of their money if the retailer can’t be turned around!

$1.0B equity offering indicates that investors believe in a turnaround

Bed Bath & Beyond announced the completion of an equity offering in the amount of $1.0B earlier this week, which is buying the company more time to restructure its business and optimize its store footprint. The equity raise is complex and divided into two parts: the first part of the equity raise will see Bed Bath & Beyond receive $225M in proceeds, whereas the second part could result in $800M in payments in future installments, depending on certain conditions.

The home-decor chain said a week ago that it was going to close 87 stores in a bid to optimize its store network and respond to falling revenues. The completion of the $1.0B equity offering is a clear success for Bed Bath & Beyond since the retailer was, despite considerable business challenges, capable of raising a significant amount of money for its restructuring efforts.

Proceeds after costs are set to be used to repay Bed Bath & Beyond’s ABL credit facility. The company has secured more than half a billion dollars in incremental liquidity last year and expanded its ABL facility to $1.13B, which is now getting repaid.

The equity raise is also a psychological victory for Bed Bath & Beyond since the company succeeded in getting investors to buy into its turnaround plan which may include further store closures. Most importantly, the equity raise addresses the firm’s strained liquidity situation. Bed Bath & Beyond’s cash resources have dwindled in the last year and the retail chain reported cash and cash equivalents of only $153.5M at the end of the third-quarter, down 70% compared to the year-earlier period.

Bed Bath & Beyond closed approximately 400 retail locations last year, and the company just announced another 150 store closures, on top of the 87 store closures announced last week, in order to downsize its operations, control its cash situation and stem a dramatic decline in revenues.

Bed Bath & Beyond reported a serious drop in net revenues in the company’s third quarter, which ended on November 26, 2022. The retail chain reported $1.26B in net revenues for FQ3’22, showing a decline of 33% year over year, and BBBY reported a much wider than expected operating loss of $450.9M. With cash resources dwindling and the company receiving a default notice from JPMorgan at the end of January, Bed Bath & Beyond had to raise additional cash to avert imminent default.

Bed Bath & Beyond has seen a fundamental deterioration in its business over a longer period of time, with COVID-19 shutdowns making the situation worse. Because the company’s store footprint is shrinking and the company faces material profitability challenges, all major key metrics for the business point to the down-side.

Short squeeze potential

The combination of a successful equity raise and a huge short interest ratio could potentially result in another major short squeeze for the retailer. Bed Bath & Beyond is a heavily shorted stock with a short interest ratio, according to highshortinterest.com, of 47%. Bed Bath & Beyond is also the second most heavily shorted stock on Wall Street, and growing investor confidence in the retailer’s restructuring prospects could lead to an epic unwinding of Bed Bath & Beyond short positions. With a 47% short interest ratio, it wouldn’t take much for BBBY to mimic its August 2022 short squeeze, which pushed shares of the retailer from $5 to $30.

Priced for bankruptcy

Shares of Bed Bath & Beyond are valued at a P/S ratio of 0.06 X, showing effectively a bankruptcy valuation. The retailer’s shares are also trading more than 50% below its 1-year average P/S ratio. I see BBBY only as a potential short squeeze candidate here and not as a long term recovery play. If the market is correct about the possibility of a bankruptcy of Bed Bath & Beyond, then investors would most likely lose all of their invested money.

Other retailers in the industry are valued at significant higher price-to-sales ratios, including Lowe’s (LOW) or Wayfair (W), but these companies also don’t face immediate bankruptcy. The low valuation of BBBY relative to other retail companies therefore reflects chiefly Bed Bath & Beyond’s higher bankruptcy risk in my view.

Risks with Bed Bath & Beyond

Bed Bath & Beyond is a struggling retail chain that has suffered from declining sales, constrained inventory and falling market share due to growing competition from e-Commerce companies like Amazon (AMZN). The COVID-19 pandemic obviously made things worse for the home-decor chain, and the company is down-sizing rapidly as a result. Bed Bath & Beyond has staved off bankruptcy for now, but if the company fails to turn its business around fundamentally, there is a good chance that equity investors could get wiped out completely.

Final thoughts

Bed Bath & Beyond is a highly speculative bet on a short squeeze now that the retail company has achieved both a significant financial and psychological victory. The $1.0B equity offering is very good news for Bed Bath & Beyond because it demonstrates that the company can raise money from investors. If Bed Bath & Beyond succeeds in turning its sales around, then there is, in my opinion, a good chance that the retailer’s stock could be subjected to another, potentially major short squeeze, considering that the short interest ratio sits just below 50%!