Bed Bath & Beyond’s Stock-Sale Deluge Lures Retail Investors

It is this kind of confidence among individual investors that has kept trading volumes in Bed Bath & Beyond stock robust as the company floods the market with hundreds of millions of shares even while warning about a potential bankruptcy. 

Over the past couple of months, Bed Bath & Beyond issued more than 300 million shares through a complex equity deal involving hedge fund Hudson Bay Capital Management LP, bringing the number of shares to 428 million at the end of March, up from 117 million as of late January. The company is now trying to sell hundreds of millions of additional shares directly into the market in a last-ditch attempt to avoid chapter 11. 

The increasingly diluted stock has been dipping lower and lower the more shares the company sells, which means the company needs to sell even more to raise the minimum of $300 million it said it needs from the latest stock-sale effort to stay out of bankruptcy. Investors and analysts following the retailer refer to this dynamic as a “death spiral.”

The shares closed at 31.4 cents Tuesday, and are down more than 90% since January, shortly before the company began raising capital through the deal with Hudson Bay.

Heavy trading volumes in Bed Bath & Beyond’s stock, with at least 100 million shares changing hands each day over the past week, are largely due to retail investors’ interest in the well-known consumer chain, propelled in part by various investment theories espoused on social media.

As of April 3, Bed Bath & Beyond had 260 million shares available to sell, which would only net the company about $80 million given the stock’s trading price Tuesday of roughly 31 cents. To meet the $300 million equity-raising threshold it says it needs, the company has scheduled a shareholder vote for May 9 to seek approval of a proposal for a reverse stock split that would free up more new shares it can sell. 

Holders of 428 million shares as of the close of business on March 27 are eligible to vote, and Bed Bath & Beyond will need to get a majority of them to vote in favor for the proposal to pass.

The retailer’s investor base, composed primarily of individual investors, may make it difficult for the company to round up the needed votes, investors and analysts said. In general, it is harder to round up votes from a widely dispersed crowd of retail investors than from a smaller group of institutional firms, they said. 

In a recent securities filing, the company disclosed that two institutional firms owned less than 5% of the stock combined. The remainder of the owners are mostly individual investors, analysts said. 

“While there continues to be speculation around our story, our choices have been to improve our liquidity and drive our turnaround,” a representative for Bed Bath & Beyond said.

Mr. Maalej said he doesn’t plan to vote on the shareholder proposal because he is certain that Mr. Cohen is about to swoop in and make the vote irrelevant. “I’m not voting, because my vote isn’t going to change anything. It’s like in politics,” Mr. Maalej said.

A failure to obtain shareholder approval for the reverse-split proposal will likely force it to file for bankruptcy, the company said recently. “Holders of our common stock would not receive any recovery at all in a bankruptcy scenario,” it said.

A spokesman for Mr. Cohen declined to comment about the theories being discussed about him on social media. Mr. Cohen’s RC Ventures LLC held a position close to 10% of the company’s shares last year before selling all of it in August. 

Adam Pritchard, a securities law professor at the University of Michigan Law School, said there is no requirement in securities laws that the securities a company wants to sell are worth anything. “The premise is full disclosure,” Mr. Pritchard said. “As long as they’ve fully disclosed a very high risk of bankruptcy, what they’ve done is legal.”

“I love the stock, and I want it to survive, and thrive. That is why I keep buying shares, every time it drops 30 percent, I buy a lot more,” said Sukhjinder Sandhu, a Twitter user responding to a question posted on the social-media site by The Wall Street Journal.

Contrarian bets paid off for retail investors in two other distressed “meme stocks”—cinema chain
AMC Entertainment Holdings Inc.
and car-rental company
Hertz Global Holdings Inc.

After having shut down all of its theaters due to the Covid-19 pandemic, AMC was on the brink of bankruptcy when it began an effort to sell shares to individual investors in September 2020. The shares caught fire amid a burst of investor enthusiasm on social media under the banner #SaveAMC, and in 2021 rose to $72 from $2 in a matter of months. 

Hertz shares were bid up by small investors after the company filed for bankruptcy in May 2020. The company tried to capitalize on the buzz by selling new stock, but later quashed the efforts because the Securities and Exchange Commission discouraged the sale out of concerns for consumer protection. When Hertz emerged from bankruptcy a year later, its business had improved and the company ended up returning $8 a share to shareholders.

Unlike AMC and Hertz, which largely struggled because of the restriction of normal activities during the Covid-19 pandemic, Bed Bath & Beyond’s woes have been driven more by the challenges of pursuing a bricks-and-mortar-focused business model amid the rising popularity of e-commerce, analysts said. 

As it tries to round up shareholder votes, Bed Bath & Beyond also has to satisfy a strict fundraising schedule to remain in compliance with its loan agreements. Its senior lenders
Sixth Street Specialty Lending Inc.
and
JPMorgan Chase
& Co. required that Bed Bath & Beyond raise $25 million during the seven-day period ending April 11, and another $36 million during the seven-day period ending April 18. It is unclear whether Bed Bath & Beyond is on track to meet these thresholds.

Some investors trading Bed Bath & Beyond securities and options have been baffled by the small-investor enthusiasm.

Chris Rodriguez, 30, a professional investor in Southern California who manages his own money, said he owns roughly $100,000 of the company’s unsecured bonds, which he purchased at around 9 or 10 cents on the dollar, betting some assets such as BuyBuy Baby can return some recovery in bankruptcy.

He said that he thinks the chatter about a near-term acquisition by Mr. Cohen on social media is crazy and that the company has been taking advantage of these people to raise money on behalf of its lenders, though it likely won’t be enough to avoid chapter 11. 

“I don’t know if there’s a lot of examples of companies diluting their shareholders right before bankruptcy,” Mr. Rodriguez said.

Write to Alexander Gladstone at [email protected]

Corrections & Amplifications
Kais Maalej said he has been a buyer of Bed Bath & Beyond shares. An earlier version of this article misspelled his last name as Maleej. (Corrected on April 11)