Time Is Running Out For Bed Bath & Beyond

 BBBY stock has collapsed 83% from early-year highs.

 That decline doesn't make the stock a buy; this remains an indebted, sharply unprofitable
business.
 Bed Bath & Beyond bond prices, rather than the stock price, highlight the real risk.

Even by the standards of a plunging retail sector, the sell-off in Bed Bath & Beyond
(NASDAQ:BBBY) has been breathtaking. As recently as late March, BBBY stock was above $28; it
closed Tuesday below $5. Incredibly, shares are threatening levels seen during the worst of the March
2020 broad market sell-off.

The size and speed of the decline might tempt some investors into believing the stock is “too cheap.”
But as we've emphasized elsewhere, focusing on the size of a sell-off is a classic investing error known
as (https://www.investing.com/analysis/the-case-against-coinbase-stock-at-the-lows-200624417)
“anchoring bias.”

This market has punished that error. Many “pandemic winners” — among them the likes of Peloton
Interactive (NASDAQ:PTON) and Coinbase (NASDAQ:COIN) — declined 70% or 80% and then
continued to fall.

There's a very real risk BBBY stock follows a similar path. The reason why is highlighted by the price
investors should be focused on: the price not of Bed Bath & Beyond's stock, but its bonds.

Yes, BBBY Was A Pandemic Winner

It's become obvious that, contrary to initial expectations, U.S. retailers benefited from the novel
coronavirus pandemic. Between stimulus payments from the federal government and limited spending
on travel and entertainment, consumers had plenty of cash, and not much to spend it on beyond
sprucing up their homes.

The problem now is that there simply isn't that much left to buy, as evidenced by the
(https://www.investing.com/news/stock-market-news/target-issues-second-profit-warning-in-three-
weeks-on-inventory-overhang-2834325) inventory challenges at even leading retailers like Target
(NYSE:TGT) and Walmart (NYSE:WMT).

For Bed Bath & Beyond, the pandemic now looks like a brief reprieve from a long period of operating
weakness. Same-store sales are the lifeblood of a retailer, and the only way for retail profits to grow
consistently. Bed Bath & Beyond had struggled on that front for years before the pandemic: same-store
sales growth on average was negative between fiscal 2015 and fiscal 2018 (fiscal years end the
following February) before BBBY posted a 6.8% decline in FY19.

The declines have returned with a vengeance. Comparable sales fell 12% in the fiscal fourth quarter,
leading to (https://www.investing.com/news/bed-bath--beyond-stock-is-down-after-big-eps-miss-
analyst-sees-no-positives-432SI-2803278) a massive profit miss relative to expectations. Q1 was even
worse: comparable sales (which include online activity) (https://www.investing.com/news/stock-
market-news/bed-bath--beyond-slumps-15-on-a-sizeable-q1-miss-432SI-2842219) plunged 23% year-
over-year.

Wall Street analysts now expect total sales to decline 17% this year — and, on average, project Bed
Bath & Beyond to post a loss of over $6 per share. Three months ago, those same analysts expected
Bed Bath & Beyond to turn a profit.

The Case For Bed Bath & Beyond Stock

The combination here is untenable. Declining comparable sales, steep losses and an indebted balance
sheet — Bed Bath & Beyond has over $1 billion in debt — is a brutal combination for a retailer. Bed
Bath & Beyond needs to turn its business around.

Of course, the company has been trying to do so for years now. GameStop (NYSE:GME) chairman,
and significant BBBY shareholder, Ryan Cohen made
(https://s.wsj.net/public/resources/documents/bbbletter030622.pdf) exactly that point in a letter to
management in March. As shown by pre-pandemic sales figures — and a plunge in BBBY stock from
almost $80 in early 2015 to $10 five years later — those efforts never worked.

There perhaps is some hope still. BBBY is bringing in (https://www.investing.com/news/stock-market-

news/bed-bath—beyond-ceo-steps-down-2842170) a new chief executive officer. There has been
speculation about a sale of the Buy Buy BABY business, which Cohen in March estimated could be
worth “several billion dollars”. In April, the Wall Street Journal reported that Buy Buy BABY indeed
(https://www.investing.com/news/stock-market-news/bed-bath—beyond-spikes-on-reports-of-interest-
for-buybuy-baby-unit-2808949) had drawn interest from potential buyers.

But hopes for a turnaround seem to be thinly based. Again, it's been close to a decade since this
business showed consistent growth. Inventory challenges will take several quarters to work through.
Interest in Buy Buy BABY probably has dimmed after the Q1 release; other child-focused retailers like
The Children's Place (NASDAQ:PLCE) have seen their own valuations plunge in recent months.

Even if Bed Bath & Beyond could get Buy Buy BABY sold for $1 billion — about 1x FY20 sales, as
detailed in the company's Analyst Day presentation that year — that would only remove the debt from
the balance sheet. This still would be a money-losing company valued at about $400 million.

At the very least, it would take a significant amount of time for Bed Bath & Beyond to get the company
profitable — and prove to investors that it could stay that way.

Watch The Bond Market

The problem is that Bed Bath & Beyond may not have that kind of time. As noted, the plunge in the
stock — 83% in less than four months — has been incredible. But the decline in the company's bond
prices has been nearly as steep — and perhaps even more important.

As recently as early March, Bed Bath & Beyond's 3.749% bonds due in 2024 were trading at par. That
price implied a tiny possibility that the company would go bankrupt before it repaid that debt.

Four months later, those same bonds last traded at 39. Longer-dated maturities trade even lower.

Those prices suggest the bond market is pricing in a greater than 50% probability that Bed Bath &
Beyond doesn't make it to August 2024, when the first tranche of bonds come due, without filing for
bankruptcy and likely wiping out shareholders.

To be fair, Bed Bath & Beyond doesn't necessarily have to get to a point where it can repay that debt at
maturity. Some progress in the turnaround could comfort debt investors enough to allow a refinancing
transaction to occur.

But Bed Bath & Beyond has barely two years to show that progress. The bond market is telling equity
investors it doesn't believe the company will succeed. Equity investors should listen.

As of this writing, Vince Martin has no positions in any securities mentioned.