Bed Bath & Beyond's bankruptcy sends meme-stock world into a spiral

On Sunday, April 23, the home goods retail giant Bed Bath & Beyond filed for Chapter 11 bankruptcy protection. The company has been on the decline for months, staving off bankruptcy by raising funds through a series of ambitious stock offerings and by slowing their "cash bleed" by closing stores.

Bed Bath & Beyond is a type of big-box retailer called a "category killer" — these are stores that specialize in a particular type of consumer product, and can operate at a volume and offer many products smaller businesses simply can't compete with — Staples and Best Buy are two other examples.

However, with the rise of online shopping, the category killers are starting to see their day fade. Radio Shack went from a thriving company based on brick-and-mortar stores to a much smaller, primarily online endeavor after filing for bankruptcy in 2015. Toys"R"Us, though still hanging around as a brand, lost its relevance after closing its final two independent U.S. locations in 2021. With this bankruptcy filing, Bed Bath & Beyond seems doomed to go the way of these category killers. However, the company has one, very unlikely ally that makes their situation unique.

r/WallStreetBets is a notorious forum on Reddit where users share their investment experiences, often filtered through in-jokes and memes. They were responsible for the 2021 GameStop short squeeze, in which the members of the subreddit utilized their collective power to artificially drive up the price of GameStop, with the intent of forcing short-sellers (investors who bet against the price of a stock) to lose a lot of money. After receiving national attention for this, the fabric of the community changed permanently. With an influx of new members drawn to them via the GameStop squeeze, a number of splinter communities have formed that focus on trying to replicate such high-risk stunts.

r/BBBY is the gathering place of choice for those who believe that Bed Bath & Beyond will be the subject of the next short squeeze. Much like GameStop, it is a category killer undergoing a long, slow decline at the hands of Amazon and other online retailers. Also like GameStop, it has drawn the attention of a number of short-sellers who seek to profit off its decline. By its nature, short-selling is a highly risky investment, and if a stock's price starts to turn up it can cause a feedback loop that keeps driving it higher and higher.

For months, the users of r/BBBY have been holding onto the hope that the company would soon turn around and that the predatory short-sellers would no longer be in a position to profit from its decline. Upon the news of bankruptcy breaking, one user said "We are either all going down broke or all going to have more money than what to do with, there is no in between."

Users compared the situation to that of the car rental company Hertz, which filed for chapter 11 bankruptcy in 2020 due to pandemic-related financial woes. They were acquired by Knighthead Capital Management, and when the economy began to open, their stock price turned around and shareholders were rewarded with a handsome payout.

Since 2021, the "memestock" community has become an unignorable group in the financial world. Whether or not they actually possess the capital or coordination to replicate another GameStop squeeze, they are still a large population of investors whose decisions have the potential to affect markets and the sentiments of other investors. In their bankruptcy petition, Bed Bath & Beyond does not cite short-selling as a reason for their closure; however, many on the subreddits believe that predatory short-selling is in fact the primary reason for their decline. It's a place where conspiracy theories often flourish, as people search for explanations as to why the predicted short squeeze hasn't happened yet.

Bed Bath & Beyond seems to be on death's door. Their website has a banner reading, "We have made the difficult decision to begin winding down our operation," and many stores are advertising their "everything-must-go" sales. But before it goes the way of Radio Shack and Toys"R"Us, there's a large number of unusually devoted investors who may lose a lot of money in the process.