Retail has been on fire this year, with apparel leading the way. Specialty retailers like TJX Companies (TJX) are up 23%. But Bed Bath & Beyond (BBBY, Financial) has flatlined. Back in November, the stock dipped under $20 for the first time since 2008 and quickly popped back 20%, only to drop again. It is now back above $20 a share.
Ray Dalio (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) each own over 100,000 shares of the stock. Even with the recent run from $16, they’re all down.
Valueline ranks the shares as “untimely” and Morningstar puts a fair value of $17.10 on them, yet I still cannot think of a stronger home goods retailer. Sure, Amazon (AMZN) is the everything store and will take some business away from it, but Bed Bath & Beyond has remained profitable and continued to grow its revenue while rebuilding its online sell through. The company has decent presence across social media and now offers free shipping and delivery on many items. And, with new changes in management coupled with the same great in-store service, future value could be significantly higher.
The company has an enterprise value of $3.5 billion, generates over $1 billion in Ebitda with $425 million going to the bottom line. In the last decade, it earned over $7.7 billion in net income on $100 billion in sales. Even if the next decade is half as good, the company will pay for itself. The question is, will consumers still be shopping at Bed Bath & Beyond in 20 years?
Taking the long view, if the company can stabilize margins, the 36% rate should be enough to reinvest in growth without cutting its 3% current dividend. And in the short term, it has guided for earnings per share in the low-$2.00 range. That is lower than analysts' estimates of a $2.75 to $2.80 range but is offset by the possibility of a return to comp-store sales growth this year.
While traders have pushed the stock down 50% over the last 12 months by accumulating a 20% short position, now is the time to buy.
I know that I’ve been optimistic about Bed Bath & Beyond for years, and it’s because I believe in building positions in good companies that are stagnant or undervalued, even if it takes a long time to realize strong performance. Let’s say you did the same with Microsoft between 2008 and 2013, slowly building a large block in the $25 range over a period of five years. Today, the stock is at $100 a share, a 300% return in a decade not including dividends.
It was just over four years ago that Bed Bath & Beyond’s stock traded above $70 a share. Today, its sales and book value are higher, and the journey back could be fast if the company can demonstrate an ability to stop falling profits.
Disclosure: I am not long/short any stock mentioned in this article.
