Bed Bath & Beyond (BBBY) and Carvana (CVNA 1.60%) are two of the market's most heavily shorted stocks, with 71% and 44% of their outstanding shares being sold short, respectively, as of Feb. 27.
It's easy to see why investors are so bearish on these two companies. Bed Bath & Beyond failed to keep up with Amazon, Walmart, and other better-run retailers over the past decade, and it hasn't grown its annual revenue nor posted an annual profit since fiscal 2017, which ended in March 2018. Carvana's online sales of used cars slowed to a crawl as inflation curbed purchases of vehicles and rising rates discouraged customers from taking out new auto loans.
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Both companies drowned in red ink as their sales growth stalled out, and their balance sheets cracked under their massive loads of debt. However, the belief that these two companies could go bankrupt has already reduced their valuations to fire sale levels. With an enterprise value of $3.6 billion, Bed Bath & Beyond trades at 0.7 this year's sales. Carvana's enterprise value of $9.3 billion gives it a comparable ratio of 0.8.
Therefore, any positive news might lift both stocks and spark massive short-squeeze rallies in this volatile market. But can either of these struggling companies stabilize their businesses long enough for that to happen?
Bed Bath & Beyond lives to suffer another day
On Feb. 1, Bed Bath & Beyond failed to pay its creditors $28 million in interest on its $1.2 billion in senior notes. The company then had a 30-day grace period to make those payments before it defaulted, but many investors -- including me -- believed it would be forced to file for bankruptcy protection.
But on Feb. 7, it completed a new equity offering worth more than $1 billion. It initially received $225 million from the sale, and it expects to receive another $800 million in future installments. That cash infusion enabled it to pay off all of its outstanding interest payments on Feb. 28.
OTC: BBBY
Key Data Points
It doesn't need to pay any more interest until Aug. 1, so it still has nearly five months to get its house in order. But that could be painfully difficult: In the first nine months of fiscal 2022, its revenue dropped 28% year over year to $4.16 billion as its net loss widened from $401 million to $1.12 billion. Analysts expect its revenue to decline 29% to $5.58 billion for the full year as its net loss more than doubles from $560 million to $1.28 billion.
The company is still trapped in a cycle of margin-crushing markdowns and store closures, and it probably can't escape that loop as long as inflation curbs consumer spending. The one card it has left to play is a potential sale of Buy Buy Baby, its infant-oriented banner that has been growing faster than its namesake stores. That sale might bring in some fresh cash and help it stay solvent -- but it would further throttle its revenue growth.
Carvana could run out of cash this year
Carvana's revenue rose 6% to $13.6 billion in 2022, but that represented a severe slowdown from its 129% growth in 2021. Its growth stalled out as the vehicle shortage during the pandemic reversed into a supply glut -- which caused used car prices to plunge as interest rates rose. Its net loss widened more than tenfold from $287 million to $2.89 billion.
Those staggering losses caused Carvana's three biggest creditors, which collectively held about 70% of its debt, to band together last December to force the company to either restructure its debt or pursue fresh financing. That news sparked concerns that Carvana would go bankrupt.
NYSE: CVNA
Key Data Points
Carvana had $6.8 billion in long-term debt on its balance sheet at the end of 2022, which easily eclipsed its $434 million in cash and equivalents. Only $201 million of that debt matures within the next 12 months, but it still paid $486 million in interest payments on all of its long-term debt in 2022.
Analysts expect Carvana's revenue to decline 12% to $11.95 billion this year, but for its net loss to only narrow to $1.47 billion. Simple math suggests it could fail to pay off the current portion of its long-term debt and its upcoming interest payments this year.
However, Carvana's business could still stabilize this year if used car prices recover. Those prices in the U.S. climbed for the third consecutive month in February as inflation and the high prices of new vehicles drove more consumers toward the secondhand market. If that acceleration continues, Carvana might just have a shot at stabilizing its struggling business.
The better buy: Carvana
I wouldn't buy either of these speculative stocks right now. But if I had to choose one over the other, I'd definitely pick Carvana as the better short squeeze candidate. It faces a lot of near-term headwinds, but its business could recover quickly if the used-car market stabilizes. Bed Bath & Beyond just bought itself some more time, but I believe it's still headed toward the same retail boneyard as Sears, J.C. Penney, and other poorly run retailers.
