$BBBY and Cohen

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My basic view is that if you are a company that has become a meme stock, you should do an at-the-money offering to sell as much stock as you can to retail investors at irrational prices. There are, however, reasonable objections to that view. Two are:

  1. You will want to be really careful about disclosure. If you sell a bunch of stock to retail investors at irrational prices, and then the stock drops, someone will sue you saying “you didn’t tell me this price was irrational.” There are defenses there, but you need to be careful. Certainly if there’s any bad news that might come out, you’ll want to disclose it before the stock offering, because you don’t want lawsuits of the form “I bought your stock at irrational prices because I didn’t know about the bad news.” 
  2. You will have to get a bit lucky with timing. If you prepare a registration statement and announce an at-the-money offering at the peak of meme-stock enthusiasm, shareholders might say “YES MORE STOCK!” and the price might go up. But if you notice that you’re a meme stock and then go off and prepare a registration statement and get lawyers comfortable with it, that takes time, and by the time you are ready to launch the offering you might not be a meme anymore.

Bed Bath & Beyond missed its window by like two weeks:

Bed Bath & Beyond Inc. shares plunged in premarket trading Wednesday after the home-goods retailer announced in a filing that it may offer, issue and sell shares of its common stock from time to time. 

Shares in the retail-trader favorite sank as much as 21% as of 6:42 a.m. New York time, erasing an earlier gain of as much as 6.5%. The company said it plans to use proceeds from any sales of its common stock to, among other things, pay down its outstanding debts. The announcement comes as investors geared up for a strategic update from the home-goods retailer, due before the opening bell. …

It’s been a wild month for Bed Bath & Beyond shares amid a return of retail-trader interest. The stock jumped from a low of $4.89 at the start of August to an intraday high of $30 in the middle of the month, before paring those gains. It came under pressure recently after influential investor Ryan Cohen sold his stake in the firm, only to bounce back on the possibility of fresh financing.

There was a brief insane period — basically Aug. 16 and 17 — between when:

  • Cohen, who bought some way-out-of-the-money call options on Bed Bath in February and March, re-disclosed his purchase of those options for trivial technical reasons, which got his retail-investor fans excited and pushed up the stock, and
  • Cohen disclosed that actually he had dumped all of his stock (and options).

Cohen took advantage of the rally to sell all his stock at an average price of about $23 per share. Bed Bath & Beyond did not. Here is the prospectus that it filed today for its at-the-market offering of up to 12 million shares. Here is its announcement of “strategic changes” (store closures, new financing, etc.), and the strategy update deck, and I suppose you can’t sell the stock without updating people on the strategy and financial position. At noon today, the stock was at about $9.70.

I don’t know what to tell you. Here is a story about Bed Bath retail investors and Cohen:

On Wednesday, August 17, Cohen disclosed that he was selling his entire stake, and by Thursday he had fully closed his position with a gain of about $60mn. The sales sparked the worst one-day pullback in the history of Bed Bath & Beyond stock.

While some retail investors took to Reddit to express dismay, still more rallied around Cohen. One wrote that it just “wasn’t like him” to “pull the rug out” from under his followers. “Not gonna lie . . . did panic . . . but bought more. I have faith in him and this will make sense soon!” said another user.

“Cohen is the most highly regarded person in these communities, after Keith Gill,” said Christopher Kardatzke, co-founder of alternative data provider Quiver Quantitative, referring to a widely followed meme-stock trader better known by his YouTube username, Roaring Kitty. “A lot of the interest in Bed Bath as a meme stock had to do with Ryan Cohen’s involvement.”

“Usually a large insider sale is unanimously seen as a bad thing, but within this community there are theories that maybe Cohen sold Bed Bath in order to create a merger with GameStop,” Kardatzke said.

In order to … what? Cohen’s meme-lord status comes mainly from the fact that he is the chairman of the board at GameStop Corp., but he … is not … a Bed Bath investor … anymore? Why would he … merge them? I am so lost. But I guess that’s what it means to be a meme stock. Nothing needs to make much sense.

The other fact about Bed Bath & Beyond that I like is this, from its most recent Form 10-Q:

Between December 2004 and April 2021, the Company’s Board of Directors authorized, through several share repurchase programs, the repurchase of up to $12.950 billion of the Company’s shares of common stock. … Since the initial authorization in December 2004, the aggregate total of common stock repurchased is approximately 264.7 million shares for a total cost of approximately $11.728 billion. 

In December 2004, Bed Bath’s market capitalization was about $12.5 billion, according to Bloomberg data. In the intervening 18 years, Bed Bath has spent a bit more than $11.7 billion buying back its stock; as of noon today, its market capitalization was a bit less than $800 million. Those numbers add up almost exactly: Of the $12.5 billion that Bed Bath was worth in 2004, shareholders got paid back $11.7 billion (94%) in cash and $0.8 billion (6%) in remaining Bed Bath stock. Bed Bath was doing stock buybacks this year, as its business was deteriorating; in fact, the reason that Cohen re-disclosed his options position in August is that his ownership percentage had increased due to those buybacks. 

And now, after buying back 264.7 million shares at an average price of $44 per share for decades, Bed Bath needs cash and wants to sell 12 million shares to whoever will buy them.

In general when some troubled brick-and-mortar retailer has spent billions on stock buybacks, I am not troubled. Other people are: “If it had hung on to that money, it wouldn’t be in trouble now,” they say. I disagree. The problem, often, is with long-term trends in the business. By sending money out to shareholders when times were good, Bed Bath managed its decline gracefully. Sure today the company is worth a fraction of what it was worth a decade ago, but its shareholders, as a whole, did fine. They took some of their value in shares in a declining company, but most of it in cash thrown off by that company.But eventually you are left with some stub, a smaller company with a lower stock price that has reached the end of its throwing-off-cash phase. What do you do with that? Well, I dunno, the modern corporate-finance approach is I guess that you make it a meme stock? By the time you have finished this graceful decline, your company (1) is in shaky financial circumstances, so it attracts short sellers and (2) has some nostalgia value, because it was once a big name and now isn’t. That combination is valuable now! Now being a nostalgic company with shaky finances can attract a whole new shareholder base, a post-cash-flow shareholder base. You pay shareholders as much as you can with buybacks, and whatever’s left you sell to the meme people.