To The Moon

Bed Bath & Beyond on Tuesday said it had been notified that its stock would be delisted from the Nasdaq in the wake of its bankruptcy filing. In a statement from Bed Bath & Beyond, “Nasdaq informed the Company that trading in the Company's common stock would be suspended at the opening of business on May 3, 2023.” The long-struggling company filed for Chapter 11 protection on Sunday and said that while its 480 combined stores would remain open for the time being, there was a plan in place to liquidate inventory and shutter all locations.

BBBY lost 99% in the last one year

This follows a post on Reddit calling for sympathy and advice from the site on how other investors dealt with their lost in the collapse of the stock. The poster lost $100,000 in Bed Bath & Beyond, he had owned 30,000 shares at an average cost of $2.70 in the now worth nothing stock. 

A poster on Reddit seeking help on how to deal with a $100k loss

This useful case allows investors to learn from the mistakes of others and to not make the same mistake when analysing a company and deciding whether to invest in it or not.

A brief history of Bed Bath & Beyond

The chain of small linen and bath stores, named Bed 'n Bath was founded by Warren Eisenberg & Leonard Feinstein, two veterans of the discount retail industry in Springfield, New Jersey back in 1971. It changed its name in 1987 to Bed Bath & Beyond, to reflect its expanded merchandise and bigger superstores. The company spent little on advertising, instead it relied on print coupons in weekly newspapers to attract customers.

The company went public in 1992 with 38 stores and around $200 million in sales. By 2000, those figures leapt to 241 stores and $1.1 billion in annual sales. The 1,000th Bed Bath & Beyond store opened in 2009, when the chain had reached $7.8 billion in annual sales.

However, when e-commerce came about, the company was slow to make the transition, and home decor is one of the most common categories bought online. Online shopping weakened the attractiveness of Bed Bath & Beyond, as customers could find cheaper alternatives like on Amazon. Walmart, Target and Costco have grown over the past decade, and they have been able to draw Bed Bath & Beyond customers with lower prices and a wider array of merchandise. Discount chains such as HomeGoods and TJ Maxx have also undercut Bed Bath & Beyond’s prices. Without the differentiators of the lowest prices or widest selection, Bed Bath & Beyond’s sales stagnated from 2012 to 2019, in which we will examine later in detail.

And then Covid hit in 2020, the company closed all of its stores while rivals that were deemed essential remained open. Sales sank 17% in 2020 and another 15% in 2021.

The financials 

It's important to examine the financial health of a company before you even get close to clicking the buy button. Personally, I like to use Seeking Alpha or Morningstar as they have really good presentation on these numbers.

Total revenues since 2013

Operating income has been on the decline since 2013

It can be seen that since the peak in the fiscal year ended March 2018, its revenues have started to dip. Looking at operating income, it has continued to decline since 2013. And in March 2018, operating income was below $1 billion, while revenues were mostly flat at $4 billion between 2013 & 2018. And then since 2020, operating income was negative, implying the company was losing money. 

Cashflow from operations 

Likewise, cashflow from operations tells a similar story, the inflow from the business was on a decline. 

Cheap gets cheaper until it is so cheap at $0

If you were to study the chart, the average cost of $2.70 per share that the guy who lost $100,000 likely bought it sometime late last year. Since it's an average, let us assume he bought it throughout 2022. Now if the business has been on the decline since 2018, would you invest your money in such a company? The stock looks cheap at $2.70 indeed if you consider that at some point in mid 2021, it traded around $35 per share. Or at its peak in January 2014, it was $80 per share. Until you realise that cheap becomes cheaper, until it cannot get any more cheaper at $0 per share. 

Hence if you had done your due diligence, would you have even parked your money in a losing business?

Another example of cheap becomes cheaper

Let's take another look at a another stock, that was trading at $372 in October 2021. Today it's trading roughly around $74 per share. Which will seem cheap!

Sea Limited traded at a high of $372 in Oct 2021

I'm sure everyone here is familiar with Sea Limited, which engages in digital entertainment (Garena), e-commerce (Shopee) and digital financial service (SeaMoney).

Sea Limited Total Revenues

Sea Limited Operating Income

From a total revenue perspective, this company has seen its sales growing exponentially. However if you were to look at operating income, it has also grown exponentially, in the southbound direction, aka loss making since 2014. 

Cashflow from operations 

Likewise cashflow from operations is inconsistent, it seemed to turn around in 2020 gaining positive cashflow from operations but has made a huge negative in 2022. 

Shares outstanding has increased 

Also the shares outstanding has increased, and has increased fourfold from 2014 to 2022, diluting shareholders value massively.

One might have an arguement that Sea Limited is still in its early phase of cashburning as it continues to build market share, hence this large amount of cash burn is necessary. 

Cash & cash equivalents decline for last six quarters

Also looking at the balance sheet, it's cash position has been on the decline for the last six quarters. 

After pouring through the financials of Sea Limited, the numbers just doesn't look attractive. Unless you are counting on a miracle that eventually Sea Limited will be able to suddenly become profitable and start to generate positive cash flow or at least have positive operating income. But if one were to count on miracles, it would be better to have a go in the casino, as the stock market is not really a place for your to try your luck.

Summary - it's all about profitability 

In summary, when you make your decision on why to invest in a certain company, you should take a look at if the company is consistent in growing its revenues, operating income and net income. Has there been one off years like 2022, where due to certain macroeconomic factors where its revenue had decline? Will the company be able to return to growth if the economy improves? What about the share count, has the company continued to dilute shareholders or are they buying back shares? 

There are also other factors like it's quick ratio, current ratio, interest coverage and debt-to-equity ratio that are also just as important when evaluating companies.

Last point is one has to remember, cheap can become cheaper, until it gets so cheap and it turns to zero. The most important thing is to have a diversified portfolio of 8 to 12 stocks and not to go 100% into one stock and hope you can turn it 2X or 3X or 4X eventually.

$Bed Bath & Beyond(BBBY)$ 

$Grab Holdings(GRAB)$ 

$Sea Ltd(SE)$ 

@TigerStars