We’ve heard a lot recently about how troubled retail chain Bed Bath & Beyond plans to solve its financial woes by changing its merchandising to include more national brands, taking out expensive loans, closing 150 stores, laying off 20% of its workforce and potentially Selling 12 million shares of new stock, which would raise about $100 million from Friday’s closing price. (And, of course, there has been more turmoil in recent days with the tragic suicide of CFO Gustavo Arnal.)
But one of the main reasons Bed Bath & Beyond is in such deep financial trouble is that it has historically spent tons of money buying back its stock at prices well above the current market price.
Yes, the company would still be in trouble even if it hadn’t made these huge acquisitions. That’s because it continued to pour money into new stores even as companies like Amazon began eating its lunch by selling home products online — forcing Bed Bath & Beyond to play catch-up.
But Bed Bath & Beyond’s problems would have been much less severe if the company had acted prudently instead of buying back nearly three-quarters of its stock since it adopted a stock buyback plan in late 2004.
Bed Bath & Beyond might just be another stockpile of memes for you. But as I wrote for the Washington Post last year, the trade of GameStop, AMC and Bed Bath & Beyond is a game for many Reddit investors, when it shouldn’t be.
Why is the company, which did not get back to me for comment, in such dire straits?
When you dive into its financial statements, you see that we’re looking at a classic example of the risks companies run when they buy back their stock.
If you talk to people on Wall Street, they’ll generally tell you that companies that buy back their own stock are doing a good thing by “returning money to shareholders.” They will also tell you that reducing the number of shares in a company tends to boost the value of its remaining shares.
It sure sounds great. But Bed Bath & Beyond wouldn’t be in anything like the trouble it’s in right now if it hadn’t spent billions to buy back its stock at an average cost of nearly five times its current share price.
Let’s go through the math. From the end of 2004 through last May 28, according to information in its most recent earnings statement, Bed Bath & Beyond spent about $11.7 billion—that’s billion, with a B—buying back about 264.7 million shares. (That’s more than three times the 79 million shares it currently has outstanding.) The average price is about $44.30, nearly five times the company’s share price on Friday, which is below its current price per company stock.
And we’re talking about current events as well as history.
In the three months ended May 28, during which it took out a $200 million loan, Bed Bath & Beyond says it spent about $40.4 million to buy back about 2.3 million shares. That’s an average cost of about $17.56, roughly double Friday’s price.
From a reading of its financial statements, the company spent about $273 million to buy back stock for the 12 months ended May 28. That’s an average cost of about $16.19 per share, well above Friday’s price.
If the company manages to earn $9 a share for the 12 million shares it says it wants to sell, that would be about $86 million less than the average price it paid to buy back shares over the past 12 months. That would be more than $400 million less than the total average cost of $44-plus for all the shares he has bought since 2004.
A company is supposed to operate by buying low and selling high. It’s too bad for anyone who cares about the fate of Bed Bath & Beyond’s employees, its suppliers and its longtime shareholders that the company’s financial managers have set it back terribly.
Alan Sloan is a seven-time winner of the Loeb Award, business journalism’s highest honor.
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