The 20% off standard has served the company well over the years, helping it grow from $3 billion in sales in 2002 to over $12 billion today. Just looking through Bed Bath & Beyond’s (BBBY, Financial) 15-year financial record is impressive, but the past does not equal the future.
Risk vs. reward
The stock sits at its lowest price in five years, down from $78 in the last 52 weeks. There’s a rather sizeable short position, sitting at 10% and while the company maintains very solid profit margins, in the last decade these have been shrinking.
However, the management at Bed Bath & Beyond has done a fantastic job continuing the upward march in sales, while buying back 125 million shares in the last decade, 43% of the outstanding shares, including another 7 million shares in that last quarter. Investors can expect the company to buy back north of 50 million shares under its current authorization. This could put the EPS, given the current profitability, close to $7 per share. Given the company’s historic P/E multiple (14.9), the shares are significantly undervalued at the current price.
Bed Bath & Beyond is a best-in-class retailer that analysts widely appreciate for its decentralized merchandising strategy, the improving omnichannel presence, and an intriguing international growth opportunity. In the last few years, the company has generated about $275 in sales per square foot, and while it doesn’t have pricing power with consumers, it still carries a powerful brand presence. Customers still like to touch and feel products before they buy them (for now) and Bed Bath & Beyond allows them to do it.
The latest
In the fourth quarter of 2015, Bed Bath & Beyond turned in better-than-expected fiscal fourth-quarter results with earnings of $1.91 a share for the period, up from $1.80 in the comparable year-ago quarter. The results were driven by slightly better sales growth, wider margins and a 6 cents a share one-time benefit related to a favorable state audit settlement. Bed Bath & Beyond has done an excellent job keeping capital spending in check, shedding less than 40% of income each year on this expenditure. In 2016, the company expects an uptick to $425 million due to technology projects, namely the deployment of new systems and equipment in stores, enhancements to digital, web and mobile capabilities, further investments in data analytics and a new POS system. All of these together will hopefully create a better customer experience and generate more sales at the same high profit margins.
Guru ownership
The stock is owned broadly by guru investors, yet only one (Hotchkis & Wiley) has more than 1% of its AUM in Bed Bath & Beyond. And, to be fair, Hotchkis & Wiley has lagged the Standard & Poor's 500 for over a decade. I’m not sure that it’s necessary to limit your exposure to 1% on Bed Bath & Beyond because the future growth of the stock price is not entirely dependent on the growth of the company as a whole. At this price point, it wouldn't be unheard of for the value investors to continue adding to their positions in the stock.
Of note
Morningstar has a “consider buying” price of $49 on the company. Valueline has an A++ financial strength rating on it with a price target of $100. GuruFocus has a 5-star rating and a DCF Value of $92.82. I would be shocked if they were all wrong.
Start a free seven-day trial of Premium Membership to GuruFocus.
