Revenue Growth Is the Key for Bed Bath & Beyond

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Feb 27, 2015
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In this article, let's take a look at Bed Bath & Beyond Inc. (BBBY, Financial), a $13.9 billion market cap company, operating more than 1,500 stores in all 50 states, Puerto Rico, Canada, and Mexico.

Revenues

From fiscal 2010 through fiscal 2013, the firm posted a three-year compound annual growth rate (CAGR) in sales of about 12%. This growth has been achieved by the international growth and its well-recognized retail brands (Bed Bath & Beyond and Buy Buy Baby). For example, the company operates more than 30 Bed, Bath & Beyond stores in Canada.Â

Revenues (Millions of U.S. $)

Year 1Q 2Q 3Q 4Q
2015 2,657 2,945 2,943 -
2014 2,612 2,824 2,865 3,203
2013 2,218 2,593 2,702 3,401
2012 2,110 2,314 2,344 2,732
2011 1,923 2,137 2,194 2,505
2010 1,694 1,915 1,975 2,244

Margins and Profitability

Looking at profitability, revenues rose by 2.72% and earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.23 vs $1.12). During the past fiscal year, the company increased its bottom line. It earned $4.81 versus $4.58 in the previous year. This year, Wall Street expects an improvement in earnings ($5.05 versus $4.81).

The net margin is ranked higher than 90% of the 1288 Companies in the Specialty Retail industry.

The return on invested capital (ROIC) is good at 25.2% in fiscal 2014, but it can decline next fiscal year due to lower projected operating margins.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
BBBY Bed Bath &Beyond 26.80
HVT Haverty Furniture Companies Inc 2.88
RH Restoration Hardware Holdings Inc 13.18
KIRK Kirkland's Inc 10.91
 Industry Median 8.78

The company has a current ROE of 26.80%, which is higher than the industry median. Also, it is higher than the ones exhibited by Haverty Furniture Companies Inc. (HVT, Financial), Restoration Hardware Holdings Inc. (RH, Financial) and Kirkland's Inc (KIRK, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Year ROE (%)
Feb-05 24.08
Feb-06 25.65
Feb-07 24.20
Feb-08 21.60
Feb-09 15.29
Feb-10 18.04
Feb-11 20.87
Feb-12 25.20
Feb-13 25.94
Feb-14 25.49

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 15.2x, trading at a discount compared to an average of 27.4x for the industry. To use another metric, its price-to-book ratio of 4.36x indicates a premium versus the industry average of 2.40x, while the price-to-sales ratio of 1.25x is above the industry average of 0.90x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $19,585, which represents a 14.4% compound annual growth rate (CAGR).

03May20171142591493829779.png

As we can appreciate, the stock has risen over the past year.

Final Comment

Bed, Bath & Beyond operates one of the largest U.S. chains of superstores. The company seems to be in the right line in terms of strategies and drivers for future growth, not only in the U.S., but also in international markets where we still believe it has interesting growth opportunities.

The PE relative valuation and the return on equity that significantly exceeds the industry average, make me feel bullish on this stock.

Hedge fund gurus like Chuck Royce (Trades, Portfolio) and Jean-Marie Eveillard (Trades, Portfolio) have added the stock in the last quarter of 2014, as well as Pioneer Investments (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned