is planning a reverse stock split, the company said on Friday, sending the shares tumbling in after-hours trading.
In a reverse stock split, each outstanding share is converted into a fraction of the share. So if a company declared a one for 10 reverse stock split, every 10 shares would be converted into a single one. This move is generally undertaken to increase share price, according to the Securities and Exchange Commission.
“Our proposal for a reverse stock split will enable us to continue rebuilding liquidity to execute our turnaround plans and better position the Company financially,” said CEO Sue Gove in a press release.
The move comes just a few weeks after Bed Bath completed a public equity offering to raise over $1 billion. Equity offerings inject more shares into the market, thus diluting existing shares.
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The reverse stock split would have the opposite effect. The proposal would decrease the number of shares outstanding, Bed Bath said in a filing with the SEC.
The proposal could also improve the perception 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 increase broker interest, especially among institutional investors and investment funds, the company added. A higher share price could also help decrease the stock’s volatility, according to the filing.
That said, the move comes with certain risks, including that the reverse stock split doesn’t increase the price of common stock or decreases the overall trading market for the shares.
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In addition, markets tend to view reverse stock splits negatively, meaning that investors may lose money as a result of the fluctuations in trading prices following the split, according to the SEC.
“Companies that do reverse stock splits are often in some financial distress, with dim prospects for recovery,” explains a blog post from Titan Global Capital Management. “This may prompt investors to sell and move on.”
Holders of the company’s common stock as of the close of business on March 27 will be allowed to vote on the proposal at a special shareholder meeting later this year. The time, location, and other details regarding the special meeting will be communicated at a later date, Bed Bath said.
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Bed Bath & Beyond’s board has yet to determine the ratio of the proposed split, but it will range between a one for five ratio to a one for 10, the company said on Friday.
The reverse stock split “would not have any effect on the actual or intrinsic value of our business or a shareholder’s proportional ownership in the Company,” Bed Bath said. It also will have no impact on the company’s business operations or outstanding debts.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
