Shifts in retail consumption over the last decade have forced companies like Dillard's (DDS, Financial) and Bed Bath & Beyond (BBBY, Financial) to evolve strategy just to keep up with target markets. Both stocks are down year to date, offering investors a great buy-in opportunity.
Dillard’s Inc. @ $87.00
Dillard’s is a fashion apparel, cosmetic and home furnishing retailer and while the growth of new mall openings has tailed off tremendously, Dillard’s has remained profitable through great product curation. Future growth will need to come from new offerings, which like Kohl’s (KSS, Financial), Dillard’s is also rolling out new beauty and fragrance lines.
Financially speaking, Dillard’s is on solid footing for now. Despite revenue declines over the last decade, the company used buybacks to significantly increase its earnings and book value per share. Profit and book value are key drivers of market prices, not necessarily revenue, as witnessed with Dillard's.
2005
- Revenue: $7.7 billion
- Income: $121 million
- Equity: $29.52 (per share)
- Shares: 82 million
- Price: $19.68
2015
- Revenue: $6.8 billion
- Income: $325 million
- Equity: $50.24 (per share)
- Shares: 41 million
- Price: $87.00
The question is always: Will earnings rise in the future and at what rate? At $87.00 a share, the stock is down 38% in the last six months to a year low. Of course, other retail stocks have fallen like a knife through this base. Earnings per share could reach $8.90 for the year. At its historic average multiple of 13, a price in the $110 to $115 range seems more fairly valued.
Bed Bath & Beyond Inc. @ $56.61
Bed Bath & Beyond is one of the best brands in the retail industry. It also has a best-in-class decentralized merchandising strategy, helping it operate with very high margins. Its stock has been beaten down in 2015, falling 25% in a year; the Standard & Poor's is only down 7%.
This presents a great opportunity for both short-term and long-term buyers and management expects same-store sales growth to be between 2% and 3% for the year, and for earnings to come in around $5.65 a share.
At its current price, I think its highly possible to see a price increase based solely on reevaluation. Bed Bath & Beyond has done all the right things from doubling sales, tripling profits, increasing equity per share and buying back roughly 37% of the shares outstanding. Yet, the price has trailed the performance of the Standrd & Poor's 500 over the last five- and 10-year periods.
Five-Year vs. Standard & Poor's
10-Year vs. Standard & Poor's
2005
- Revenue: $5.8 billion
- Income: $573 million
- Equity: $7.61 (per share)
- Shares: 299 million
- Price: $40.18
2015
- Revenue: $11.9 billion
- Income: $929 million
- Equity: $15.05 (per share)
- Shares: 181 million
- Price: $56.89
Growth across mobile and online commerce points indicate that customer-led initiatives are taking hold. Bed Bath & Beyond does a great job with both discounts via online and direct mailings as well as a return policy that's second to none. Such investments should help the company's revenue and brand long term.
I agree with the GuruFocus estimate of Fair Value, being more in the $80 to $90 range. If the company does earn $5.65 a share this year, that would be consistent with the historic multiple of 15x.
Conclusion
I don’t know if either of these companies will make it long term without changing the way the stores are designed. Bed Bath & Beyond feels cramped and Dillard’s feels stodgy, both relics of the '90s. We’re going to be hitting 2020 soon, and retail stores must change to remain relevant. Both Dillard's and Bed Bath & Beyond have the potential and the cash to do just that. If they do, these prices will look very cheap in retrospect.
