Looking at Bed Bath & Beyond Inc. (BBBY, Financial)´s numbers, it is clear that this operator of  specialty retail stores has built a strong base, that has allowed it to achieve an impressive growth trajectory. Its capital structure has proved to be more conservative than its larger peers Target (TGT, Financial) and Macy's (M, Financial). The result of this is a debt-free balance sheet, while Target has nearly $14.7 billion in both short and long-term debt, and the total debt of Macy's climbed to more than $7.1 billion. Additionally, its power to generate solid operating cash flow gives the company financial flexibility to draw a promising future.
Competition, Crisis and Long-term Strategies
BBBY possesses a 1,500 store base that includes Bed Bath & Beyond, Harmon, Christmas Tree Shops (CTS) and That!, World Market, Cost Plus World Market, World Market Stores and buybuy BABY. The company operates in all 50 states of the U.S., as well as in the District of Columbia, Puerto Rico and Canada. It also opened four retail stores in Mexico City through a joint venture under its namesake brand.
BBBY´s management has achieved a unique layout for its stores, grouping related product lines into separate areas, which gives the impression of individual specialty stores. The company also aligns products according to climate, demographics and changing trends. This key differentiator creates a strong competitive advantage that combines powerfully with its decentralized supplier strategy. Having over 7,000 suppliers shipping their products allows BBBY to handle relatively lower distribution costs than its competitors. The growing enhancement of its multi-channel presence is another key factor that sustains its growth, by competing with powerful online players like Amazon.com Inc. (AMZN, Financial)
What Are the Concerns?
Although BBBY offers a wide range of everyday low prices and is well positioned from a pricing perspective, concerns arise in relation to customers’ spending behavior. Buyers are being affected by economic critical factors like high household debt levels, unemployment and credit availability. This translates into lower sales volumes, which have a heavier impact in the brick and mortar segment. Thus, while the company competes well in prices compared to its online and mass merchant rivals, other retailers may lower prices to irrational levels to survive. This pricing environment has taken BBBY to a greater use of coupon redemption and to sell products that deliver smaller profit margins.
Nevertheless, BBBY´S wide operating cash flow allows the company to display a battery of investments, especially in the long term. These include opening 33 new stores in the U.S. and renewing the existing ones to adapt to the new market conditions. In the technologic arena, the company will direct its investments to the upgrading of mobile sites and apps; building, equipping and staffing its new IT Data Center; and improving network communications in stores. Altogether, this will have a positive impact on sales growth and create further margin expansion opportunities.
Short-Term Drop, Long-Term Acquisition
BBBY´s stock value suffered a recent drop of as much as 13% due to the lowering of its fourth quarter and fiscal year forecast in almost every component of its income statement. This drop set the company´s share value at 13.3 times its trailing earnings, a good price compared to an industry median of 18.5. Furthermore, its stock buyback program enhanced shareholder value by repurchasing 2.3 million shares during the third quarter. In fact, Guru Joel Greenblatt (Trades, Portfolio) increased his shares by 1,107.47%. Its high return on equity of 25.40% compared to the industry average of 9% and a healthy earning yield of 12.80% compared to the industry average of 7.80% adds to its historical steady growth. As a result, I feel this short-term drop makes BBBY a bullish long-term acquisition.
Disclosure: Vanina Egea holds no position in any stocks mentioned.
