The Crazy Way Bed Bath & Beyond Avoided Bankruptcy
The company teamed up with a hedge fund to take money out of the pockets of individual investors.
The way in which Bed Bath and Beyond avoided bankruptcy this week is absolutely wild: the company essentially teamed up with a hedge fund to take money out of the pockets of individual investors.
Here’s what happened.
As you might know, Bed Bath and Beyond is a retailer that operates in North America. It sells everything from furniture to kitchenware to home appliances and it’s a popular sight in strip malls across America.
At its peak several years ago, the company operated almost 1,600 stores, while generating more than $12 billion in sales and $1 billion in profits annually.
But since then, a combination of changing consumer tastes and competition from online retailers has taken a toll on the firm.
Fewer and fewer people are going to Bed Bath and Beyond stores and when they do go there, they often don’t find what they’re looking for.
As a result, the company has had to downsize significantly.
Over the past few months, the company announced that it would be shutting nearly 400 of its 760 remaining stores in order to cut costs and stem its financial losses.
Last year, the company lost over $500 million and this year it’s on track to lose more than $1 billion.
Over the past several months, as Bed Bath and Beyond’s financial health quickly deteriorated, the company began struggling to pay its bills.
It got so bad that some of the company’s suppliers stopped shipping products to its stores because they were worried that they wouldn’t get paid for their inventory.
The lack of inventory made consumers even less interested in shopping at Bed Bath and Beyond stores, leading to further deterioration in the company’s financial health, which in turn made suppliers more reluctant to ship products to the company’s stores.
It was a vicious cycle.
Earlier this month, it looked like Bed Bath and Beyond was headed for the worst-case scenario.
The firm had already missed making payments on some of its debt and was reportedly on the verge of filing for bankruptcy.
But then something extremely unexpected happened.
On Tuesday, the company announced that it had raised upwards of $1 billion from a group of investors led by the hedge fund Hudson Bay Capital Management.
But this was no ordinary investment.
In return for the money, Bed Bath and Beyond gave the investors a special type of stock (convertible preferred stock) that allows them to buy shares in the company at a steep (14% or greater) discount to its market price.
That means that these investors can buy Bed Bath and Beyond stock at a discount directly from the company, and then immediately turn around and sell it on the open market for a big profit.
If you do the math, these investors could make profits of $140 million—and maybe much more—if they sell all of the stock that they’ve been granted*.
This almost sounds too good to be true.
But there’s just one little catch.
The investors can only purchase Bed Bath and Beyond’s stock at a discount if the stock remains above $0.72.
If the stock drops below that level before the investors can unload their stock, then they’ll start taking losses.
So what these investors are essentially betting on is that Bed Bath and Beyond’s stock stays above $0.72 so they can sell the $1 billion worth of shares that they’ve been granted for a profit.
Meme Stock
For most companies that are in as bad a shape as Bed Bath and Beyond is, there’s no guarantee that their stock is going to stay above any certain level. A bankrupt company’s stock is often worth nothing.
But Bed Bath and Beyond isn’t just any stock.
It’s a meme stock.
You might have heard of GameStop, which is another meme stock and arguably the most famous meme stock of all.
Well, Bed Bath and Beyond is kind of like that.
Ever since 2021, groups of individual investors have periodically gotten together over social media and agreed to buy and hold shares of the company for no other reason than to create a sort-term surge in the share price.
Then the stock inevitably crashes and a few weeks or a few months later, the cycle repeats.
We’ve seen this over and over again with various meme stocks.
What the hedge fund investors in Bed Bath and Beyond are counting on is for these meme stock investors— who are mostly individual, small-time investors— to keep buying up the stock.
And while they do that, the hedge funds are going to be dumping their discounted shares onto the market.
This isn’t going to be a quick task. The hedge funds have to unload about $1 billion worth of shares. For context, the market value of all of Bed Bath and Beyond’s existing shares is currently $300 million.
The hedge funds are going to have to do this very gradually and methodically. They want to sell their shares at the highest possible price without causing a plunge in the stock below the $0.72 floor I talked about earlier.
They have one year to do this, though of course, the faster they can sell, the faster they can make their profits.
Fortunately for them, it looks like meme stock investors in Bed Bath and Beyond are sticking around for now. On Monday, the stock almost doubled in a day.
Before that, in January, the stock quadrupled in a week.
If this keeps up, the hedge funds have a good chance to unload their shares on unsuspecting individual investors.
On the other hand, if individual investors start to wise up and realize that they’re being used, they could quickly turn on the stock, causing a sharp drop in its price.
To me, the funny part about this whole situation is that if Bed Bath and Beyond wasn’t this meme stock that people were buying up irrationally, this deal would never have happened.
We’d probably be talking about how the company had filed for bankruptcy this week and how most or all of Bed Bath and Beyond’s stores would be closing in the not-too-distant future.
Instead, the company continues to limp along thanks to this special deal that it made with hedge funds who see an opportunity to take money from meme stock investors.
Still, that doesn’t mean that Bed bath and Beyond’s problems have gone away. This is just a band-aid that allows the company to avoid immediately defaulting on its debt and to survive for a little while longer.
Many analysts believe that it’s only a matter of time before the company eventually goes under.
*in addition to receiving convertible preferred stock, the investors received nearly 100 million common stock warrants with a $6.15 exercise price