Why Bed Bath & Beyond stock is crashing on share sale news

Yahoo Finance Live’s Brian Sozzi discusses the decline in stock for Bed Bath & Beyond amid share sale news.

Video Transcript

- Bed Bath and Beyond attempts to avoid Chapter 11 bankruptcy filing with plans to raise around $1,000,000,000 from a preferred stock sale. Will this be enough to keep the battered retailer afloat? That's where we find Brian Sozzi. The company came out with the pricing of this offering this morning. It's a pretty complicated raising of money.

BRIAN SOZZI: Yes. So let's try to just decode this and its very simplest form. So here's some of the funding allocations or aspects of this deal. First up, Bed Bath and Beyond getting-- let's say, about $225 million up front from this offering. It stands to gain another $800 million over time. Also receiving another $100 million loan from 63 partners, a company or investment firm that had already given them a loan. So you're probably now wondering, why is the stock absolutely crashing close to 50% on this news.

Essentially, Bed Bath is diluting its current shareholders by offering these additional shares. That is, this in its very basic form. Now we saw shares really explode yesterday close to 100% on just speculation that this type of financing was coming to pass, but this does not mean that Bed Bath and Beyond is suddenly now a healthy retailer. It will be using these funds to pay down interest on a JP Morgan loan it defaulted on. It will be using this money to pay down other forms of debt and it has a lot of debt on its balance sheet. And then, whatever's left over, Bed Bath is hoping that it can fund its transformation.

Realistically, there is no transformation. The money that does have left over will likely be used to buy inventory to restock its shelves, that's first. And then secondarily, start to position the company to maybe have a holiday season this year to some extent. So all of this is a very, very tall order. But at least today, some of these offerings and this cash raise will avert or push out any potential bankruptcy filing. But by no means is this a healthy retailer on the verge of some type of major comeback. That's just not the case.

- And even in the restocking of shelves, much of that and the revenue that they do bring in is really just to continue the operations in order to then pay back some of would they still owe to other debtors as well.

BRIAN SOZZI: That's correct. So far, the take here-- and this might even echo what I said about Bed Bath last week. So I'll just re-up this one. The end is still near. It is a fundamentally challenged company. Any time you see a retailer, their sales down 20, 30% over the course of several quarters, it tells you, there is something mighty, mighty fundamentally wrong with the company. I will say this again, Bed Bath remains a zombie retailer. The lights are still on but it remains borderline irrelevant.

- Yeah. So it's always interesting when we see in this situation the shares spike like they did yesterday and then plunge like they did today. Obviously, there's probably professionals in there who are trying to trade the very small increments when the stock moves. But if retail investors getting in there, it's a tricky thing to trade.

BRIAN SOZZI: I'll just add this too. So this money will be used to buy inventory because we've seen and I've certainly seen it from these bad, bad stores. The shelves are bare and a lot of these stores so this money will be used to restock these shelves. Then what happens next comes the summer and the spring. Once this money was used to buy new merchandise, do you have more money to continue to replenish your shelves? And then, oh yes, you still have a whole entire vendor community very concerned about getting paid. What rates of interest are they charging you to get and buy that inventory? Probably very high.

- Yeah. Because in some cases, it's not that they're paying new money for new inventory. They're paying vendors for unpaid bills for inventory that was either already delivered or not delivered. They're on the back foot.

BRIAN SOZZI: Yes. if you're a vendor that-- let's say, sells coffee machines to a Bed Bath and Beyond, you probably still don't trust that you're going to get paid back. So what do you do? You raise the cost of goods on a Bed Bath and Beyond. It's not just the coffee maker. It's probably every other vendor in the store.

- All right. Well--

BRIAN SOZZI: I wish I had good news for you. I really I do. I mean, I like getting towels there and I wish I can continue to get my towels there but I'm not hopeful, guys. So all I think--

- We're going to have to find a new towel then.

BRIAN SOZZI: I like Target. Target towels are good.

- OK.

BRIAN SOZZI: Very soft, very soft on my skin.

- We do too. All right. We've got some other suggestions.

- We got you.