Why Bed Bath & Beyond Tumbled 20% This Week

What happened

Shares of Bed Bath & Beyond (BBBY 2.55%) tanked 20.1% this week compared to where they ended last week, according to data from S&P Global Market Intelligence. The drop came after an analyst suggested the home goods retailer might have reached the end of the line with bankruptcy as the final outcome.

Loop Capital analyst Anthony Chukumba said investors ought to “begin to seriously consider ‘endgame’ scenarios” and reiterated his sell rating on the stock and $5 price target. Bed Bath & Beyond ended the week at $9.64 per share.

Couple looking at kitchenware.

Image source: Getty Images.

So what

Chukumba believes with worsening macroeconomic headwinds, a deteriorating financial position, and it being “highly unlikely” activist investor Ryan Cohen will prove to be the chain’s “savior,” the only out for Bed Bath & Beyond will be to sell the buybuy Baby chain and file for Chapter 11 bankruptcy protection.

Chukumba was also critical of Cohen’s leadership at GameStop where he serves as chairman, but has anticipated over a period of widening losses since he assumed control of the video game retailer with no meaningful signs of improvement.

“We think it will be very difficult for BBBY to regain the market share and relevance the company has lost over the past several years — and management has run out of ‘levers to pull’ at this point,” the analyst wrote to investors in a note.

Now what

It’s difficult to argue with deteriorating economic conditions impeding Bed Bath & Beyond’s turnaround. Rampant inflation that’s the worst the country has seen in over 40 years and gas prices at record levels are pinching consumers’ ability to spend. The Federal Reserve is embarking on a program of interest rate hikes, and the need to cause the economy to contract to rein in inflation may see the Fed become even more aggressive with rates.

US gross domestic product already contracted 1.4% in the first quarter, compared to economist expectations of a 1% gain, which raises the possibility consumers will suffer through a new period of stagflation, which is when inflation remains elevated but the economy falters.

Yet that’s beyond the control of Cohen and his team, and considering he’s only been in place for about two months at the home goods retailer, having reached an agreement in March with Bed Bath & Beyond to get three board seats, it seems premature to think his efforts will be a failure.

Still, economic forces may be very well far stronger than any turnaround plan Cohen could concoct, but the retailer did win a reprieve at the end of the week when a new meme stock rally helped lift Bed Bath & Beyond stock 4.5% over the last two trading days. Before that, shares had traded as low as $8.80 per share, a 27% loss from last Friday’s close.

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