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Jonathan Poland
Jonathan Poland
Articles (251)  | Author's Website |

Risk-Reward With Bed Bath & Beyond

Based on its current price, shareholders could be in for a triple on their investment

September 13, 2017 | About:

Bed Bath & Beyond Inc. (NASDAQ:BBBY) has more than 1,500 stores across its retail lineup, which includes its flagship Bed Bath & Beyond stores, 276 Cost Plus World Market stores and 113 Buy Buy Baby stores. The stock has been cut in half since the end of 2015, but the underlying business is still producing cash as the company adjusts to new industry trends.

The company generates over $12 billion a year in sales ($83 per share) and netted $637 million in the last 12 months. If you have been waiting for a bear market to start buying, just look at the retail sector where traders continue to push valuations lower. Sellers have built a pretty sizable position with 15.7 million shares (11%) of the stock sold short.

Yet, Bed Bath & Beyond's underlying fundamentals remain rock-solid with a 24% return on equity, 15% return on invested capital and 2% dividend, which are all extremely positive factors, especially with the stock trading below seven times free cash flow. Remember, everything comes down to price paid versus value received. Right now, the bargain hunt is on considering so many stocks look overpriced.

Even better, the company (like its in-store discount) is off more than 20% from where big guru investors like Jim Simons (Trades, Portfolio), George Soros (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) all added or made new buys last quarter. If the company continues to produce solid financial results, watch for these guys to keep buying.

At the start of August, Bed Bath & Beyond announced it was cutting 880 store jobs, a small fraction of the company’s workforce of 65,000 people. In regard to the company's future, CEO Steven Temares said:

"With the evolution in retail, we continue to strengthen our digital infrastructure and invest heavily in areas such as analytics, information technology, pricing, e-commerce, marketing, supply chain and our contact centers.”

He continued:

“As we've said, the pace of our store opening has slowed and we've increased the number of store closings over the past several years. And as leases come up for renewal, if we cannot reach acceptable terms with our landlord, we would expect the pace of store closings to increase as a result of our assumptions regarding brick-and-mortar store traffic in future years, as well as the continuation of our market optimization strategy.”

The $100 billion home decor industry has been growing steadily since 2008, and it is expected to continue growing around 3% in the years ahead. It is crowded in retail, but the one thing I have always admired about Bed Bath & Beyond is its willingness to be extremely customer-oriented. From its return policy to its discounts, consumers will continue to shop at the store, both online and off.

While I do not agree that online-only retailers lack a competitive advantage (Amazon (NASDAQ:AMZN) does have a strong moat, even if its stock is overpriced), I do think it would be extremely easy for the “old school” retailers to turn their current stores into a better network of distribution centers.

This would take some policy changes and some technology built to accommodate it, but people still recognize the Bed Bath & Beyonds of the world. These consumers just want a better experience, one that saves them time. You are starting to see this shift with Wal-Mart (NYSE:WMT), which recently announced free two-day shipping on millions of items with a minimum order of $35. Eventually, that will get down to one-day and same-day standard.

The bottom line: I am a numbers guy. If the company can duplicate the last decade and double its EPS and book value over the next one, the stock will see a 15 times number at some point. If that happens when the EPS is $6 or higher, then shareholders at this price would see a triple on their investment.

Disclosure: I am not long/short Bed Bath & Beyond.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager and private advisor who has helped investors produce market beating results for more than 15 years. NOTE: I rarely publish my best ideas to the general public.

Visit Jonathan Poland's Website

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