We’ve heard a lot recently about how the troubled Bed Bath & Beyond retail chain plans to solve its financial problems by changing its merchandising to include more national brands, taking out expensive loans, closing 150 stores, firing 20% of its workforce and potentially selling 12 million shares of new stock, which would raise some $100 million as of Friday’s closing price. (And, of course, there was more turmoil in recent days with the tragic suicide of Chief Financial Officer Gustavo Arnal.)
But one of the main reasons that Bed Bath & Beyond is in such deep financial trouble is that it has historically spent tons of money buying back its own shares at prices way above the current market price.
Yes, the company would still have problems even if it hadn’t done those massive buybacks. That’s because it kept pouring money into new stores even as the likes of Amazon began eating its lunch by selling home goods online — forcing Bed Bath & Beyond to play catch-up.
But Bed Bath & Beyond’s problems would be a lot less severe if the company had behaved prudently instead of buying back close to three quarters of its stock since it adopted a share repurchase plan in late 2004.
Bed Bath & Beyond may be just another meme stock to you. But as I wrote for The Washington Post last year, trading GameStop, AMC and Bed Bath & Beyond is a game for many Reddit investors when it shouldn’t be.
Why is the company, which didn’t get back to me for comment, in such sad shape?
When you immerse yourself in its financial statements, you see that we’re looking at a classic example of the risks that companies run when they buy back their own shares.
If you talk to Wall Street people, they’ll generally tell you companies buying back their own shares are doing a good thing by “returning money to shareholders.” They’ll also tell you that reducing a company’s share count tends to enhance the value of its remaining public shares.
That sure sounds great. But Bed Bath & Beyond wouldn’t be in anything like the trouble it’s currently in if it hadn’t spent billions buying back its own shares at an average cost of about five times its current share price.
Let’s go through the math. From the end of 2004 through this past 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 works out to about $44.30, close to five times the company’s Friday stock price.
And we’re talking current events as well as history.
In the three months that ended May 28, a period 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, about double Friday’s price.
By my read of its financial statements, the company spent about $273 million buying back stock for the 12 months ended on May 28. That’s an average cost of about $16.19 a share, well over Friday’s price.
If the company manages to net $9 a share for the 12 million shares that it says it wants to sell, that would be about $86 million less than the average price it paid to buy back stock during the most recent 12 months. It would be more than $400 million less than its overall average cost of $44-plus for all the stock it’s bought since 2004.
A company is supposed to operate by buying cheap and selling dear. It’s too bad for anyone who cares about the fate of Bed Bath & Beyond’s employees, its suppliers and its long-time shareholders that the company’s financial managers got it terribly backwards.
Allan Sloan is a seven-time winner of the Loeb Award, business journalism’s highest honor.
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