Bed Bath: Bargain Hunter's Paradise

12/30/2013


  Recent Price
$77
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
16
  Shares (millions)
215
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$78.94 - $54.49

Bed Bath & Beyond ($77; BBBY), which sells products people buy when settling into a new home, offers a play on pent-up demand in the housing market. The retailer also exemplifies our strategy of buying strong growth at a reasonable price. The stock, earning a Value rank of 82 despite rallying 38% this year, is rated Buy and a Long-Term Buy.

Priced to buy

Bed Bath is notorious for stuffing shoppers' mailboxes with 20%-off coupons. Its shares offer a similar discount, trading at just 16 times trailing earnings, 17% below the median for S&P 1500 home-furnishing retailers and 18% below the median for consumer-discretionary stocks. Bed Bath shares also trade at less than 15 times year-ahead earnings, projected to rise 9%.

The discount share price reflects pervasive pessimism about traditional retailers — the fear that cheaper, online competition threatens their long-term prospects. Bed Bath controls roughly 24% of the $46 billion U.S. market for home furnishings but was slow to build its web presence and severely lags its smaller peers online. Less than 1% of sales in fiscal 2013 ended February came from the internet, according to the InternetRetailer.com Top 500 Guide. Scrambling to amend that oversight, Bed Bath has revamped its website and built a fulfillment center for online orders. Web sales could reach 4% of total revenue in fiscal 2014 ending February and 10% by fiscal 2016.

Despite its limited online presence, Bed Bath has managed to deliver consistently strong growth. Same-store sales have risen in 16 consecutive quarters and total revenue in 18 straight quarters. In the past year, Bed Bath & Beyond has outgrown its peers, with sales up 17% (the industry averaged 9% sales growth) and per-share profits up 11% (10%). Bed Bath's smaller chains — particularly World Market, Christmas Tree Shops, and buybuy Baby — lack the market penetration of the namesake brand and have greater growth potential.

Heavy promotional activity has helped drive Bed Bath's sales growth. Coupon redemption rates stand at all-time highs in the retail industry as consumers become more price-conscious. Bed Bath's coupons keep the retailer competitive with internet rivals and help ward off showrooming — shoppers checking out products at physical stores, then buying them cheaper online. Discounting has taken a toll on Bed Bath's gross profit margins, down in each of the past seven quarters. But the pace of margin erosion has slowed sharply in the past two quarters, and the company may be showing more discretion with its coupons.

For the November quarter, Bed Bath has targeted per-share profits of $1.11 to $1.16, implying a gain of 8% to 13%, on sales growth of 6% to 8%. The consensus projects earnings of $1.15 per share and revenue growth of 7%. Management sees 2% to 4% higher same-store sales in the six months ending February. Bed Bath is slated to report November-quarter results Jan. 8.

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
Aug '13
1.16
vs.
0.98
9%
78.25
-
66.19
17 - 14
May '13
0.92
vs.
0.83
18%
70.40
-
56.37
16 - 12
Feb '13
1.68
vs.
1.48
24%
60.79
-
54.33
14 - 13
Nov '12
1.03
vs.
0.95
15%
71.61
-
55.55
17 - 13
           
Year
(Feb.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
10.91
4.52
0.00
75.84
-
54.33
17 - 12
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
62
82
96
87
61
47

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


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