In this article, let's take a look at Bed Bath & Beyond Inc. (BBBY, Financial), a $13.10 billion market cap company, which isone of the best retailer of the industry.
Long-term goal
Bed Bath is a company that operates a nationwide chain of some 1,000 Bed Bath & Beyond superstores selling better-quality domestic merchandise and home furnishings. It also has stores under the names Christmas Tree Shops,World Market, Harmon and buybuy BABY. The firm is close to its long-term goal of 1,300 stores. It opened 10 net new Bed Bath & Beyond Stores in fiscal 2014, two less than the 12 stores opened the previous year. Additionally, total square footage of all Bed Bath & Beyond-owned stores grew 1.4% to 42.6 million square feet. Revenues also grew during the last three years, explained by the following: a strong same-store sales growth,strategic acquisitions and store openings.
Catalysts
The company has a decentralized merchandising strategy, as well as a solid omnichannel presence. We think that international growth and its well-recognized retail brands (Bed Bath & Beyond and Buy Buy Baby) are key drivers also for the growth. Its joint venture in Mexico City under the name "Bed Bath and Beyond" also deserve special mention.
The company will continue making efforts for expansion in the domestic market with the 1,300 Bed Bath & Beyond stores. On the other hand, in international markets such as Canada, it also has focused since 2007. The company operated more than 30 Bed Bath and Beyond stores in that country.This expansion also reaches Mexico in 2008 through a joint venture.
Store layout
The store layout is dynamic to changing conditions and creates the appearance of a collection of individual specialty stores where product lines are in separate areas. A key differentiation from peers is that the stores receive shipments directly from their suppliers, so they operate with lower distribution costs.
Major risks
Bed Bath could face some headwinds in a scenario of unexpected decline in consumer spending and recent trends where consumers shift to lower margin items.Additionally, price competition from Amazon (AMZN, Financial) for example, will probably limit operating margin expansion.
Revenues, margins and profitability
Looking at profitability, revenue growth by 1.7% while earnings per share remained flat in the most recent quarter compared to the same quarter a year ago ($0.93). During the past fiscal year, the company increased its bottom line. It earned $4.81 versus $4.58 in the prior year. This year, Wall Street expects an improvement in earnings ($5.00 versus $4.81).
The gross profit margin is currently high at 38.80% while its net profit margin of 7% trails the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| BBBY | Bed Bath &Beyond | 25.94 |
| WMS | Williams-Sonoma Inc | 22.21 |
| HVT | HavertyFurnitureCompaniesInc | 10.82 |
| RH | Restoration Hardware Holdings Inc | 3.34 |
| KIRK | Kirkland's Inc | 10.74 |
| Â | Industry Median | 9.13 |
The company has a current ROE of 25.94% which is higher than the industry median. Also, it is higher than the ones exhibit by Williams-Sonoma Inc (WMS, Financial), Haverty Furniture Companies Inc. (HVT, Financial), Restoration Hardware Holdings Inc. (RH, Financial) and Kirkland's Inc (KIRK, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 13.6x, trading at a discount compared to an average of 23.0x for the industry. To use another metric, its price-to-book ratio of 3.43x indicates a premium versus the industry average of 2.02x while the price-to-sales ratio of 1.19x is above the industry average of 0.81x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $17,615, which represents a12% compound annual growth rate (CAGR).
Final comment
Bed Bath operates one of the largest U.S. chains of superstores. The company seems to be in the right line in terms of strategies and drivers for future growth, not only in the U.S. but also in international markets where it has interesting growth opportunities.
The PErelative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like John Rogers (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio), Richard Snow (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), David Dreman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Ruane Cunniff (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
