Retailer Goes Well Beyond Bed & Bath

8/20/2012


  Recent Price
$63
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
15
  Shares (millions)
233
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$75.84 - $50.17

On paper, Bed Bath & Beyond ($63; BBBY) looks a lot like a department store. But it views itself as a specialty store — or more specifically, several specialty stores in one. The company sells products ranging from linens to cutlery to consumables, but not together. The retailer breaks its stores into sections based on product line, attempting to create the appearance of multiple stores under one roof.

Domestics — linens, bath items, and kitchen textiles — account for about 40% of sales. Bed linens alone generate about 12% of company revenue. Homefurnishings, which include flatware, furniture, kitchen equipment, food, and seasonal items, generate the remaining 60%.

Bed Bath & Beyond's mix of staples and discretionary items has yielded remarkably steady results. Sales rose in 38 of the last 40 quarters, averaging 12% growth during that 10-year period. And per-share profits have risen at least 24% in each of the last 11 quarters. The stock, with an Overall Quadrix® score of 89, is a Focus List Buy and a Long-Term Buy.

Growth opportunities

In the 20 years ended February 2012, Bed Bath & Beyond grew to 1,173 stores from just 34. In addition to its namesake stores, the company also operates Harmon, buybuy Baby, and Christmas Tree Shops.

The company believes the U.S. and Canada can support 1,300 Bed Bath & Beyond stores (about 30% above the current store count), as well as coast-to-coast expansion of buybuy Baby and Christmas Tree Shops, both of which currently have fewer than 100 locations. During the fiscal year ending February 2013, Bed Bath & Beyond expects to open 40 stores across its brands.

Over the last four quarters, the retailer managed a per-share-profit increase of 30%. That torrid pace is unsustainable, but the consensus projects 15% growth in the current fiscal year and 14% annually over the next five years. Relative to the broader market, those growth targets sound aggressive. But we see several reasons for confidence, including:

Profit-margin expansion: In the four quarters that ended in May, Bed Bath & Beyond's operating profits before depreciation accounted for 18.5% of earnings, up three percentage points from two years ago and the highest in at least a decade. Consensus profit estimates imply continued margin expansion.

Accretive acquisitions: The retailer has purchased a number of companies in recent years to expand its product line and geographic reach, including this year's deals for Cost Plus and a commercial linen distributor. These two purchases should boost fiscal 2013 earnings.

Share buybacks: Bed Bath & Beyond has reduced its share count 7% over the last year and 16% over the last five.

Conclusion

At 15 times trailing earnings, Bed Bath & Beyond trades 5% below the median homefurnishings retailer, 10% below the median specialty store, and 15% below its own three-year average P/E ratio. Obtain an annual report for Bed Bath & Beyond Inc. 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
May '12
0.89
vs.
0.72
+ 5%
74.67
-
59.79
18 - 15
Feb '12
1.48
vs.
1.12
+ 9%
63.60
-
56.72
17 - 15
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
           
Year
(Feb.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
9.50
4.06
0.00
63.83
-
44.79
16 - 11
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
89
60
61
94
92
76
44

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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