Bed Bath Holds Line On Discounts

1/30/2012


  Recent Price
$62
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
17
  Shares (millions)
242
  Long-Term Debts as % of Capital
0%
  52-Week Price Range
$63.83 - $44.79

With consumers conditioned to keep their wallets shut until stores cave in with steep discounts, many retailers must sacrifice either sales or profit margins to keep the other strong. But Bed Bath & Beyond ($62; BBBY), which sells home furnishings (58% of sales in the nine months ended November) and domestics merchandise (42%), has managed to grow sales while keeping promotions in check.

In each of the last three quarters, retailers in the S&P 1500 Index have averaged roughly 8% year-over-year sales growth. But along the way they've seen their operating profit margins shrink. Bed Bath & Beyond delivered similar sales growth but managed to fatten its margins by more than 1% year-over-year in each quarter. The retailer credits its success to limiting markdowns and stocking sales floors with 5% more inventory per square foot.

Bed Bath & Beyond earns a Quadrix® Overall score of 95, and both of its sector-specific scores exceed 90. The stock is a Focus List Buy and a Long-Term Buy.

Business breakdown

Bed Bath & Beyond operates 1,171 locations in North America, including 993 Bed Bath & Beyond stores and 178 under other brands. Management believes the U.S. and Canadian markets can support more than 1,300 Bed Bath & Beyond stores.

Cash provided by operations, up in 10 of the last 12 quarters, grew 15% to $1.11 billion in the 12 months ended November. The balance sheet features $1.53 billion in cash — up 6% in the past year — and no long-term debt. Bed Bath & Beyond also keeps investing in its business, with capital spending projected to reach a four-year high in the fiscal year ending February 2012. Management plans to open nearly 40 new stores in fiscal 2012 and about 40 more in fiscal 2013.

Buybacks have reduced the share count by 7% over the last two years and 15% over the last five. The company plans to spend $1.3 billion on repurchases over the next 15 to 18 months, enough to retire about 9% of its shares at current prices.

Sales at stores open for more than a year advanced 5.5% in the nine months ended November, lapping a 7.6% gain for the same period last year. Growth will become more difficult in the February quarter, with management projecting 2% to 4% higher same-store sales.

Looking forward

For the fiscal year ending February 2013, the consensus calls for 14% higher earnings per share on 7% revenue growth. Profit margins could come under pressure from rising inventory costs and a shift toward less-profitable merchandise. But as the economy and housing market improve over the next year or two, demand for kitchen supplies, linens, and home furnishings should rise. Bed Bath & Beyond has met or topped Wall Street profit estimates for 12 straight quarters.

The shares trade within 2% of their all-time high set in November. Yet the stock seems reasonably valued at 17 times trailing earnings, a 4% discount to its three-year average. Excluding net cash of $6.32 per share, the P/E is 15. An annual report for Bed Bath & Beyond can be obtained at 650 Liberty Ave., Union, NJ 07083; (908) 688-0888; www.bedbathandbeyond.com.

BED BATH & BEYOND
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Nov '11
0.95
vs.
0.74
+ 7%
63.83
-
53.15
18 - 15
Aug '11
0.93
vs.
0.70
+ 8%
60.55
-
48.75
18 - 15
May '11
0.72
vs.
0.52
+ 10%
57.90
-
44.79
19 - 15
Feb '11
1.12
vs.
0.86
+ 12%
50.95
-
44.22
18 - 16
           
Year
(Feb.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
8.76
3.07
0.00
50.95
-
26.50
17 - 9
2010
7.83
2.30
0.00
43.42
-
19.11
19 - 8
2009
7.21
1.64
0.00
34.73
-
16.23
21 - 10
2008
7.05
2.10
0.00
41.90
-
24.49
20 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
83
53
93
92
99
63

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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