Reverse stock splits explained through a battle against bankruptcy

Bed Bath & Beyond continues its struggle to avoid bankruptcy and regain its footing in retail. Its latest move: The company is asking for shareholder approval for a reverse stock split. AMC investors approved the same move last week. It’s a strategy you don’t often see, and most people may not understand it.

Here’s a quick lesson on good, old-fashioned stock splits — not the reverse kind: A company decides its stock price is too high and wants to make it more affordable. So it divides its shares by about half. That means there are double the number of shares available for half the price.

“And then a reverse stock split is literally the reverse of all of that,” said Philip Bond, a finance professor at the University of Washington. He said a company might consider a reverse split when the price of shares drops too low. Essentially, the company doubles the price of its stock by cutting them in half.

Bond said regular stock splits are all about optics. They scream, “I am affordable, accessible, buy me!” A reverse stock split can make a company appear more valuable. But there’s another way of looking at it.

“There are a few more sort of real reasons unrelated to market psychology why you might want to do a reverse stock split,” he said.

The Nasdaq, where Bed Bath & Beyond is traded, will move to delist companies that fall under $1 per share for 30 consecutive trading days. BB&B slipped under a dollar on Monday.

It’s why Alice Bonaime, a finance professor at the University of Arizona, said a reverse stock split sends a message “that the company is not confident enough that the stock will rise on its own. They have to take more extreme measures.”

This move doesn’t always spell doom. But Morningstar analyst Jaime Katz said BB&B is on a path of last resort.

“On top of being in a fundamentally difficult place in retailing, your biggest exposure is the housing market,” she said.

After all, it is a home goods store, and the housing market has slowed with rising interest rates. Katz added that it’s likely the company will eventually face bed, bath and bankruptcy.