Bed Bath & Beyond proposes reverse stock split and stock crash

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bed bath beyond

is planning a reverse stock split, the company said on Friday, sending shares tumbling in after-hours trading.

bed bath beyond

(Ticker: BBBY) The stock fell almost 20% to 83 cents.

A reverse stock split converts each outstanding share into a fraction of the stock. So if a company announces a 1-for-10 reverse stock split, every 10 shares will convert into one. According to the Securities and Exchange Commission, this move is generally taken to increase the stock price.

“Our reverse stock split proposal will allow us to continue building liquidity to execute our turnaround plans and better position the company financially,” CEO Sue Gove said in a press release.

The move comes just weeks after Bed Bath completed a public stock offering to raise over $1 billion. Stock offerings bring more stocks into the market, diluting existing stocks.

The reverse stock split would have the opposite effect. The proposal would reduce the number of shares outstanding, Bed Bath said in a filing with the SEC.

The proposal could also improve perceptions of the company’s common stock, Bed Bath said in the filing, as it will likely result in a higher trading price. This, in turn, could help generate interest from brokers, particularly institutional investors and mutual funds, the company added. A higher share price could also help reduce the stock’s volatility, according to the filing.

However, the move comes with certain risks, including the fact that the reverse stock split will not increase the price of the common shares or decrease the overall trading market for the shares.

Additionally, markets tend to take a negative view of reverse stock splits, meaning investors can lose money due to fluctuations in trading prices after the split, according to the SEC.

“Companies that perform reverse stock splits are often in dire financial straits with bleak prospects for recovery,” explains a blog post from Titan Global Capital Management. “This could prompt investors to sell and move on.”

Holders of common stock in the Company after the close of business on March 27 will be able to vote on the proposal at a special meeting of shareholders later this year. The time, location and other details regarding the special meeting will be announced at a later date, Bed Bath said.

Bed Bath & Beyond’s board has yet to determine the ratio of the proposed split, but it will be between a ratio of one-for-five and one-for-ten, the company said Friday.

The reverse stock split “would have no impact on the actual or intrinsic value of our company or a shareholder’s proportionate interest in the company,” said Bed Bath. Nor will it have any impact on the company’s operations or outstanding debt.

Write to Sabrina Escobar at sabrina.escobar@barrons.com