Should Bed Bath & Beyond dilute its shares after the rally?

  • Bed Bath & Beyond stock recently soared on the back of a short squeeze.
  • The retailer’s business fundamentals are worrying; the company needs more cash to avoid big cash flow problems.
  • Even though issuing more shares can help de-stress the company, in the short term the dilution can negatively affect BBBY’s business.

Figure 1: Should Bed Bath & Beyond dilute its shares after the rally?

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How can Bed Bath & Beyond benefit from a higher share price?

Just last month, Bed bath and beyond (BBBY) – Get the Bed Bath & Beyond Inc. report. the stock rose nearly 140%, with no big changes or improvements in its trading fundamentals.

This recent surge is likely due to a short squeeze. The stock is popular among “meme” retail investors, and short-term interest is over 40% of BBBY’s stock float.

Short sellers targeted Bed Bath & Beyond due to the company’s deteriorating trading fundamentals. It has failed to meet per-share loss and revenue estimates for the past four consecutive quarters.

A sudden increase in a company’s stock price can benefit the company in several ways. Thanks to this, it is possible to collect more money by:

  1. Issuance of secondary offerings, whereby the company sells new shares for cash. This dilutes the float but makes the company more valuable because it raises more cash.
  2. Issue stock compensation to employees, dilute shareholders. It is a way of rewarding company employees with stock or options, rather than cash.
  3. Perform mergers and acquisitions using company stock, which can save money on the amount he pays for stock.

Bed Bath & Beyond already has a liquidity problem

Over the past year, Bed Bath & Beyond had been the subject of a turnaround plan devised by its former CEO, Mark Tritton. Tritton’s goal was to reorganize the company’s core business to optimize operational efficiency.

But Tritton’s financial plan included prioritizing share buybacks, rather than paying off some of its nearly $1.2 billion in long-term debt.

As mentioned in a previous article, in the last quarter alone, Bed Bath & Beyond reported cash and cash equivalents of $107 million. The implication here is alarming – Bed Bath & Beyond is starting to struggle to pay its obligations.

Although the company can still pay its short-term obligations, its asset-liability ratio – which measures a company’s liquidity – has fallen in recent quarters to its lowest level in recent history.

Currently, for every dollar of debt that Bed Bath & Beyond pays off, only 1 cent remains for the company.

Figure 2: BBBY current ratio.

Figure 2: Current report BBBY.

The pressure on Bed Bath & Beyond has increased since the activist investor and GameStop (EMG) – Get the GameStop Corporation report chairman Ryan Cohen bought almost 10% of the shares. At the time of its purchase, Cohen demanded that the company make a series of strategic changes. A few months later, CEO Mark Tritton resigned.

More recently, after the company announced another troubling quarter, Freeman Capital revealed that it had become a shareholder in Bed Bath & Beyond to push for a debt realignment.

According to Bank of America analyst Jason Haas, the debt restructuring will not solve Bed Bath & Beyond’s liquidity problem. The analyst points out that having a source of cash should be much more important for the company at this time.

Dilution can be the solution

Many shareholders, especially those focused on short-term trading, fear dilution.

Despite increasing the company’s cash flow, dilution reduces shareholder holdings and is generally bearish for the stock price in the short term.

But I believe the management of Bed Bath & Beyond cannot afford to play with its liquidity situation. Even if it is not yet in crisis, the company is in a worrying liquidity situation in the medium to long term.

crazy money Jim Cramer warned that Bed Bath & Beyond needed more money ASAP:

BBBY management should seek to AMC Entertainment (CMA) – Get AMC Entertainment Holdings Inc. Class A Report. as a good example. Although the cinema chain was on the verge of bankruptcy, it managed to raise more than half a billion dollars in cash by issuing shares.

For those expecting to hold shares of Bed Bath & Beyond for the long term, dilution would be a good way to ensure healthy liquidity for the company. However, an initial drop in BBBY’s share price would be inevitable.

(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links These partnerships do not influence editorial content. Thank you for supporting Wall Street Memes)

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