Bed Bath & Beyond (NASDAQ:BBBY), founded in 1971, is a retail stores chain, operating under different names such as Bed Bath & Beyond, Christmas Tree shops, Harmon and Harmon Face Values, and buybuy BABY. BBBY sells a wide assortment of domestics merchandise and home furnishing. The company’s goal is to deliver customers good quality merchandise at every low prices, maintain wide assortment of merchandise, and to emphasize dedication to customer service and satisfaction. It has large amount of suppliers, around 5,500 with the largest accounting for around 5% of BBBY’s purchases. And the majority of merchandise is from domestic sources, with just a little from importers.
BBBY follows an expansion program that includes opening new stores in new and existing markets, as well as expanding or relocating existing stores. The growth of the company is quite notable over the last 20 years. From 1992 to 2010, the number of stores increased from 34 to 1,139, now in 50 states.
In addition, it has followed the method of acquisition of different retails stores for the purpose of growth. In 2002, it acquired Harmon, a health and beauty care retailer. In 2003, it acquired CTS, retailer of giftware and household items. In 2007, it acquired buybuy BABY, retailer of infant and toddler merchandise. More recently, in 2008, it became the partner in the joint venture in Mexico City under the brand of “Home & More.”
Recently, BBBY announced very impressive results for second quarter 2011, with earning per diluted shares increasing around 33%. Regarding operating performance, Warren Eisenberg, the co-chairman of BBBY has said that the company opened three and closed one Bed Bath & Beyond store, and opened seven new buybuy BABY stores, and four Christmas Tree Shops. So all together, it has 1,160 stores currently.
Second-quarter comp store sales, one of the most important figures for retail, increased by 5.6%, compared with 7.4% last year. For the fiscal half, comp store sales increased by 6.3% compared with 7.9% last year. The increase in comp store sales is due to the increases in both average transaction amount and the number of transactions.
Along with that, the gross margin slightly increased because of reduction in markdowns and coupons as a percentage of net sales, but it has been offset by the increase in inventory acquisition costs and the shift in the mix of merchandise sold to lower margin categories. The net margin is higher than by around 220 basis points compared to same period last year and 200 basis points for the fiscal first half. Capital expenditures of $90 million in the first half was for opening new stores, improving and renovating existing stores, or installing information technology.
With the recent strong the quarter, let's see the share performance over the years, as in the short-term, the market is a voting machine, but in the long run, it is a weighing machine.
Looking at the share price performance over 20 years, it can be seen that BBBY has performed pretty well; it went from $4 in September 1993 to $60 just currently, making an annualized compounded gain of 16.24%.
Over a 10-year history, the share price has reflected the good operating performance of BBBY. The revenue has been on a rising trend, so do the operating income and the net income, only a little set back in fiscal 2009. The return on equity and return on invested capital is always in the double digits, fluctuating between 16 – 25%, and now stays at 21.6% TTM, and on average of 21.7% over the last 10 years.
On the cash flow side, both cash flow from operation and free cash flow have been very satisfactory over time. It has a 10-year history of positive CFO and FCF.
Both CFO and FCF are set in an upward trend over time, due the expansion of the business for organic growth and acquisition of other retailers. The CFO has grown from $338 million to $987 million, whereas FCF increased from $216 million to $804 million in 10 years, with the compounded annual growth rate of 11.3% and 14% respectively.
Regarding financial health, the balance sheet of BBBY is considered to be strong. The debt/asset stays at only 34%, and the large item in the liabilities is payables (14.5%). Only 3.3% is in short-term debt, with long-term debt outstanding. Its cash position is nearly 31.5% of total assets, standing around $1.83 billion.
The hefty payables account in the balance sheet is OK; the company can delay its payment to suppliers to take advantage of the working capital. With that, even the market capitalization of $14 billion, the enterprise value after adjusting the debt and the cash it holds for BBBY is $12.2 billion only. However, take into account the operating lease and other contractual obligation, if each year it would take the company around a billion more, and the total debt/asset ratio would reach a maximum of 40-41% — still quite solvent.
In short, BBBY is a growing retailer, has very good financial health and satisfactory operating performance as well as profitability historically. And over the last 10 years, it has kept instantly producing growing operating and free cash flow. At the market price of $57 a share, the valuation would leave the P/E at 17.5, P/B at 3.6 and P/CF at 13.6. It is not cheap, but not expensive on its historical basis either. If BBBY keeps on growing and expanding over time, the price of the shares would benefit the shareholders much more. And for me, it is a stock to hold for the long term unless there is any change in its fundamentals.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.