Why Bed Bath & Beyond Is Falling Today

What happened

Shares of Bed Bath & Beyond (BBBY -3.88%) are falling 3.7% on Monday at 11:49 am ET following a downgrade of the home goods retailer’s debt further into junk category.

Moody’s dropped the retailer’s debt from Caa3 to C, which is the lowest rating possible from the service, and indicates Bed Bath & Beyond has a “very high likelihood of a default over the next twelve months.”

$20 bill paper airplane crashing into stock tables.

Image source: Getty Images.

So what

Bed Bath & Beyond is in a dire struggle to turn its business around. The company was already faltering before the pandemic, and being forced to close its retail stores to the public pushed it closer to the brink of bankruptcy.

Bondholders have as little faith in the retailer as does the ratings agency. Just last week they began circling their wagons to protect themselves from a potential debt reorganization.

The home goods outlet was reportedly investigating several potential scenarios, including a distressed debt swap that would exchange the retailer’s outstanding bonds for new, longer-term debt or equity in the company. If it does take on new debt, existing debtholders are worried their claims on the Bed Bath & Beyond’s assets could be weakened.

Now what

Bed Bath & Beyond’s debt was already considered junk, so the change itself isn’t extraordinary, but there’s a consensus building the retailer isn’t long for this world.

Net sales plummeted 28% in the second quarter and comparable sales tumbled 26% from the year-ago period. What was once a reliable machine, generating $1 billion or more a year in free cash flow, has since deteriorated into one that consistently burns through cash.

Earlier this summer an analyst suggested Bed Bath & Beyond “begin to seriously consider ‘endgame’ scenarios,” and Moody’s seems to agree.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody’s. The Motley Fool has a disclosure policy.

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