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After CFO’s Tragic Death, Bed Bath & Beyond Stock Has No Floor

Is Bed Bath & Beyond (BBBY) stock a game of Jenga that is about to end?

Jenga players “take turns to remove a block from a tower and balance it on top, creating a taller and increasingly unstable structure as the game progresses…The game ends when the tower falls — completely or if any block falls from the tower,” according to Jenga.com.

What does this have to do with BBBY? On September 4, the New York City medical examiner’s office said it had determined that on September 2, BBBY CFO Gustavo Arnal — who resided in “a Manhattan skyscraper known as the Jenga Tower,” had died by suicide, according to the Wall Street Journal.

The company said it was shocked by this tragedy. “The entire [BBBY] organization is profoundly saddened by this shocking loss,” according to the company which “didn’t name a successor and declined to comment further, citing the privacy of Mr. Arnal’s family,” noted the Journal.

This tragedy could also cause pain for BBBY shareholders who have been whipsawed in the last several months.

On July 22, I saw four reasons its stock could drop more — most notably plunging sales, dwindling cash reserves, and the termination of its CEO, Mark Tritton — who had presided over a disastrous private-label product strategy.

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Since then, new reasons have emerged for questioning the future of BBBY — in which short interest has risen from 32.4% to 40.4%. Here are three of them:

  • Loss of a key investor. On August 18, Ryan Cohen, an activist investor popular with the meme-stock crowd, dumped his shares in the retailer days after announcing ownership of out of the money call options,
  • Dilutive restructuring plan. On August 31, BBBY announced a restructuring plan that sent its stock plunging, and
  • Shareholder lawsuit alleging a ‘pump and dump’ scheme. On August 23, Arnal and Cohen were named as plaintiffs in a shareholder lawsuit alleging that “the pair sought to inflate the company’s share price before Mr. Cohen’s completion of his stock sale.” Last week, BBBY said that “it believed the suit is without merit,” noted the Journal.

(I have no financial interest in the securities mentioned in this post).

Ryan Cohen Sells His BBBY Holdings

What a short, strange trip it’s been for Cohen and BBBY!

In March, Cohen — an activist investors who is chair of GameStop and co-founder of Chewy — announced a big stake in BBBY which he suddenly dumped in August. This is one of the most destabilizing of Jenga blocks removed from BBBY.

Specifically, in March his RC Ventures announced that it held 9.8% of BBBY common shares at which time Cohen wrote a letter to its board in which he “[advised] several necessary and significant operational changes — including a potential full sale of the company,” according to GoBankingRates.

Last month, Cohen dumped his BBBY common share holdings at what looks like an impressive profit which CNBC estimated at $59 million — abetted by a big bet on call options — which give the owner the right, but not the obligation, to acquire shares at a specified price in the future.

First came Cohen’s announcement that he had made a big purchase of such call options with an exercise price way above the stock’s then-current market value — signaling that he expected BBBY stock to go way up.

On August 15, 2022, RC Ventures “announced in an SEC filing purchases of over one million January 2023 call options with exercise prices at $60, $75, and $80—significantly higher than Bed Bath & Beyond shares were trading,” according to a BusinessWire announcement of a lawsuit filed by Bragar Eagel & Squire. This news sent the stock up 29% on August 16 “on extremely heavy trading volume.”

The stock then began a painful plunge. That’s because on August 16 and 17, he dumped BBBY’s common shares at “a range of prices between $18.68 per share and $29.22” which RC Ventures had purchased at an average price of $15.34 a share.

It was not until the next day, August 18, that RC Holdings announced in an SEC filing that it had sold all its common shares. That day BBBY stock fell 40.5% — dropping about 20% more on the 19th — to $11.03. As of September 5, its shares had fallen another 22% to $8.59, according to CNBC.

BBBY’s Poor Performance And Restructuring Plan

When BBBY last announced results in June, its sales were dropping and its cash position was weak. Sadly the restructuring plan it announced last month did not inspire investors.

In the May-ending quarter, revenues of $1.46 billion fell 25% from the year before — $50 million short of the consensus estimate. Its adjusted net loss was $2.83 per share more than twice as bad as the estimated loss of $1.39, according to TipRanks.

BBBY’s cash position was very weak in May and it did not take much imagination to see it running out. At the end of May 2022, its balance sheet sported a mere $108 million in cash — down 75% from the previous quarter. During that quarter its free cash flow was negative $488 million.

On August 31, BBBY announced disappointing preliminary results for the August-ending quarter, a negative growth forecast, and a harsh cost cutting plan.

BBBY’s preliminary sales results of $1.45 billion for its fiscal second quarter were about 3.5% lower than the expectations of $1.5 billion — 25% below the previous year. The company also forecast negative free cash flow for the quarter of -$325 million and it guided investors to expect a 20% drop in same-store sales for 2022, according to TipRanks.

BBBY also announced a capital plan that included selling stock, borrowing money, and cutting costs. Specifically, the company said it has negotiated over $500 million in borrowing and plans to sell up to 12 million shares to repay long-term debt of $1.4 billion. What’s more BBBY intends to cut costs by $250 million through 150 store closings and letting go 20% of its staff.

Investors sold on the news — sending its shares down some 20% for the day. TipRanks reported that analysts had placed “a Strong Sell consensus rating based on zero Buys, one Hold, and 12 Sell ratings” with a fair value for BBBY stock price of $3.54.

BBBY Shareholder Lawsuit

On August 31, Arnal told investors that BBBY had not yet finalized its accounting for the August-ending quarter. After reading allegations in the lawsuit — on which, according to the Journal, BBBY declined to comment on September 4 — I wonder whether this accounting issue is the block that causes BBBY’s Jenga tower to collapse.

The lawsuit — whose lead plaintiff, Pengcheng Si, and others claim damages of $1.2 billion — alleges that Cohen and Arnal “artificially inflated the company’s stock price in a ‘pump and dump’ scheme to sell off his shares at a higher price,” according to DailyMail.com.

Filed in the United States District Court for the District of Columbia on August 23, the suit claims that “Cohen had approached Arnal [in March 2022] about a plan to control shares of Bed Bath and Beyond so they could both profit.”

The lawsuit claims that Arnal “agreed to regulate all insider sales by BBBY’s officers and directors to ensure that the market would not be inundated with a large number of BBBY shares at a given time.”

The lawsuit also alleges that Arnal made “materially misleading statements to investors regarding BBBY’s strategic company plans, financial condition… and reports of shares holding and selling” to help increase share prices, noted DailyMail.

The Journal reported that a pre-arranged plan established in April 2022 sold about 55,000 worth of Arnal’s shares on August 16 and 17 for roughly $1.4 million. He still owned 255,000 BBBY shares, noted the Journal.

If you or someone you know is experiencing depression or has had thoughts of harming themself or taking their own life, get help. The National Suicide Prevention Lifeline (1-800-273-8255) provides 24/7, free, confidential support for people in distress, as well as best practices for professionals and resources to aid in prevention and crisis situations. Help is also available through the Crisis Text Line — just text “HOME” to 741741