No single name stands out like Bed Bath & Beyond (BBBY, Financial) when it comes to home furnishings, but since early 2014 its price has not reflected that standing in the retail community.
With its current price nearly touching its 52-week low, and its price chart showing an uncharacteristic dip, we should ask if this price provides an entry point for value investors. But first, some essential background about the Bed Bath & Beyond (unless otherwise noted, information and data from the company’s fiscal 2013 10-K report).
History
- 1971: founded by Leonard Feinstein and Warren Eisenberg; started with 2 stores, selling mainly bed linens and bath accessories
- 1985: first store with a full line of domestics merchandise and home furnishings
- 1987: began using the name "Bed Bath & Beyond"
- 2002: bought Harmon, a health and beauty care retailer, with 27 stores
- 2003: acquired CTS, a retailer of giftware and household items, with 23 stores
- 2007: purchased Baby, a retailer of infant and toddler merchandise, 8 stores
- 2007: opened first international Bed Bath & Beyond store, in Ontario, Canada
- 2008: partnered in a joint venture operating 2 stores in Mexico City under the name “Home & More,” subsequently rebranded as Bed Bath & Beyond in fiscal 2012
- 2012: acquired Linen Holdings, LLC (“Linen Holdings”), a provider of textile products, amenities and other goods to institutional customers
- 2012: bought Cost Plus, Inc. (“Cost Plus World Market”), with 258 stores under the names of World Market, Cost Plus World Market or Cost Plus.
Takeaways: Bed Bath & Beyond has a history of 43 years in retail. In the last 12 years it has made six major acquisitions: five retailers and a company serving institutional customers. Its expansion into international markets has been slow; as it notes in the 10-K report, “Net sales outside of the U.S. were not material for fiscal 2013, 2012 and 2011.”
Business Model
- Offer quality merchandise at competitive prices
- Maintain a wide and differentiated assortment of merchandise
- Present merchandise in a distinctive manner
- Emphasize customer service and satisfaction.
Takeaways: A conventional approach to retailing, and a mix of elements that should keep it competitive in a highly competitive sector.
Business Strategy
- Ongoing expansion program - opening of new stores in both new and existing markets
- Expansion or renovation of existing stores
- Repositioning of stores within markets when appropriate
- Evolution of omnichannel [read Internet] shopping
- Continuous review of strategic acquisitions.
Takeaways: BBBY’s strategy covers all essential bases. Of particular interest will be its ability to grow online as Amazon.com and Wal-Mart step up their battle for Internet shopping dollars, in this and many other categories. This risk may be partially offset by a preference among at least some shoppers to physically touch and see fabric merchandise before buying.
BBBY by the Numbers
Takeaways: Particularly worth noting in these numbers: net sales increased by 5.4% in fiscal 2013; the current price is near the 52-week low; the P/E ratio is at 12.8; and the company does not pay a dividend.
Ownership
- Gurus: Since the beginning of 2014, GuruFocus data shows seven gurus have bought or added to their positions, with a cumulative impact of 1.8% on their portfolios; six other gurus have sold out or reduced their BBBY holdings for a cumulative impact of 2.3% on their portfolios.
- Institutional investors: 95%
- Insiders: 1%
- Short interests: 5%
Takeaways: Gurus seem generally neutral on the stock, but institutional investors do not, with an exceptionally large share of the float and outstanding shares. While Peter Lynch devotees might object, others may find this level of institutional ownership comforting. Short interests are reasonable at 5%.
Financial Strength
- No debt
- Current ratio: 2.2
- Quick ratio: 0.5
Ongoing growth, as shown in the following chart of per share growth of revenue, EBITDA, and earnings:
- Revenue per share growth, fiscal 2004 - fiscal 2013: 3.2 times
- EBITDA per share growth, fiscal 2004 - fiscal 2013: 3.0 times
- Earnings per share growth, fiscal 2004 - fiscal 2013: 2.9 times
Takeaways: Bed Bath & Beyond carries no debt, which means investors should have no concern about any kind of financial crisis in the foreseeable future. And, as it observes in its fiscal 2013 10-K report, “The Company has been able to finance its operations, including its expansion program, entirely through internally generated funds. For fiscal 2014, the Company believes that it can continue to finance its operations, including its expansion program, share repurchase program and planned capital expenditures, entirely through existing and internally generated funds.”
Management
- Founders Eisenberg (age 83), and Feinstein (age 77) remain with the company, as Co-Chairs and Directors
- Steven H. Temares (age 55) has served as CEO since 2003 and as a Director since 1999. He joined the company in 1992.
- In fiscal 2013, the company shows $33,780,000 in stock-based compensation.
- Despite the fact institutions own some 95% of BBBY’s stock, the company scores a lowly 1 out of 10 on the ISS Governance QuickScore. The ISS scoring takes issue with Bed Bath & Beyond’s Board Composition and Board Practices, Voting Formalities, Pay for Performance, and Controversies.
- Also worth noting: Days inventory has declined, from 141.99 for fiscal 2004 to 123.14 for the past 12 months; as InvestorWords notes, “The lower the days inventory, the more efficient the company is, all other things being equal. Days inventory is the first step measured in the cash conversion cycle....”
Takeaways: The company enjoys continuity with the continued service of the founders and CEO Temares. The ISS Governance QuickScore might be an issue, but institutional investors (for whom the Governance QuickScore is designed) seemed to have paid it no heed. And, a reduction in days inventory indicates management attention to productivity improvement.
Valuation
Bed Bath & Beyond first came to my attention through an Undervalued Predictable screen at GuruFocus:
As the chart indicates, BBBY is a relatively predictable stock, scoring 4 our 5. Based on its current price, and Discounted Cash Flow (DCF) calculation, fair value is put at $87.07.
Using the median P/S Score yields a slightly more conservative valuation, as shown in the following chart:
Based on the current price, median P/S value of $82.06 represents an upside of 35.6% (compared to a 30% margin of safety with DCF).
The difference between the current and potential valuations lies mainly in market responses to earnings reports in January and April. After missing estimates in January, the price gapped down from $79.68 to $69.75, and after guidance in April, the stock gapped down again, from $67.91 to $63.72.
Takeaways: Unless you believe BBBY has started down a slippery slope (and there’s little evidence to support that at the moment), it seems fair to say the stock is undervalued by 30% to 35%.
Risks
Not that we can assume an upside of 30% or more is a given. Indeed, several risk factors could cause the stock to stay rangebound, or even decline further. In its fiscal 2013 10-K, the company lists a number of these risks.
- Economic conditions, including the all the usual suspects that might affect customer behavior, including housing markets, a contracting economy, interest rates, and fuel/energy prices.
- Retail competition: In addition to the normal competition, and as noted above, Amazon and WalMart are escalating their online competition, and that may cause collateral damage to other retailers.
- Unusual weather patterns: That’s already had an effect on the company this year, and one of the reasons for the valuation gap.
- Data security failures: As we saw at Target, exploitation of a company’s IT systems can lead to not only monetary damages, but also affect managerial stability.
- Ability to continue opening new stores and to build out what it calls its omnichannel capabilities.
- And, more...
Outlook
Overall, it seems Bed Bath & Beyond is well-positioned to weather these risks, and to see its earnings, EBITDA and stock price continue their upward growth.
The company enjoys debt-free status, and has no commitments to making dividend payments. It has made a practice of buying back shares, but that might be suspended without undue consequences; that said, with prices at current levels, this would be an opportune time to repurchase.
While we might argue whether or not the bears were right to sell over the past five months, the reasons seem relatively isolated. We won’t know for sure for another couple of quarters, but at this time, the sell-offs seem to be an overreaction.
With shares trading almost at their 52-week low, and a potential 30% to 35% upside potential, Bed Bath & Beyond deserves closer inspection by value investors.
