Bed Bath & Beyond (BBBY -4.42%) shares have experienced extreme volatility since the company expressed “substantial doubt” about its future as a going concern on Jan. 5. Even though such an announcement would cast doubt about the shares, the stock has risen significantly since that time.
Nonetheless, investors need to keep their eye on the ball. Although anything could happen, investors should avoid Bed Bath & Beyond or any other company that expresses doubts about its future.
Bed Bath & Beyond’s volatility
Admittedly, one can forgive investors for being tempted to buy in hopes of a short squeeze. In recent years, they like bid stocks GameStop other AMC Entertainment Holdings higher despite narrowing competitive moats.
And Bed Bath & Beyond appeared to show that short squeezes are back. After bottoming at $1.27 per share earlier in January, it briefly spiked to almost $6 per share.
Moreover, after reaching penny stock status at the beginning of the pandemic, it temporarily moved above $50 per share in less than a year. But considering that anything can happen, investors should avoid giving in to temptation.
Why investors should hold out little hope
Also, whatever happens with the stock price, investors should remember that bleak financials back up management’s recent concerns about Bed Bath & Beyond’s future.
In the first nine months of fiscal 2022 (which ended November 26), its net sales of just under $4.2 billion fell by 28% compared with the same period in 2021. The company also reported $1.1 billion in losses for that period.
The ongoing losses have tremendously strained a balance sheet that shows only $154 million in liquidity. Additionally, the more than $1.9 billion in existing long-term debt makes it all the more difficult to raise the cash needed to stay in business.
Unfortunately, Bed Bath & Beyond appears to have caused its own demise. The company was slow to embrace omnichannel selling even as e-retailers such as Amazon other Wayfair undercut it. Also, a heavy reliance on coupons amounted to a tacit admission that the company had no answer to competitive threats other than to cut prices. That strategy failed, and revenue steadily deteriorated.
Bed Bath & Beyond also failed to learn a lesson from peers. Companies such as Sears, JCPenney, and its one-time direct competitor, Linens ‘n Things, went down a similar path in recent years. Instead of learning from those examples, Bed Bath & Beyond will likely follow them.
Take Bed Bath & Beyond as a lesson, not an investment
Given the company’s market position, investors should treat Bed Bath & Beyond as an opportunity to become a more discerning investor.
Indeed, a comeback for this stock is not impossible. However, buying a stock when survival is doubtful is gambling, not investing. Investing for the long term typically involves companies in stable, growing businesses positioned for long-term gains.
Moreover, Bed Bath & Beyond offers lessons on how a company’s competitive moat can narrow dramatically. E-commerce significantly changed the economics of the retail industry, and even some of the most prominent retailers went under when they failed to adapt.
Knowing these facts, now is a time for Bed Bath & Beyond investors to acknowledge reality, act accordingly, and learn. By staying aware of changing business conditions and financial performances, investors make it more likely that they will avoid getting stuck in underperforming retail stocks.
John Mackey, former CEO of Whole Foods Market, at an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.