Bed Bath & Beyond has been expanding. In 2012, it purchased Linen Holdings and Cost Plus World Markets. It estimated 41 new store openings in the fiscal year 2012. Still the stock (BBBY) today can be purchased at 13 times multiple, which is in the low range of the historical multiple its shares have commanded. This may be a great time to initiate a position in BBBY if you have been considering this stock to provide a steady appreciation over a period of 5 – 10 years or more.
Bed Bath and Beyond is not a very cheap stock based on its book value, even though the current price to book ratio of 3.34 is at the low end of its historical valuation. The stock traded as high as 6.7 times book in 2002. However, it is important to keep in mind that as a company grows and scales, the focus shifts towards earnings power (unless the business is capital intensive and the balance sheet is heavy with tangible assets).
Profitability is a bit different and as the company continues to enhance its foot print, either by opening new stores, creating new concepts or acquiring other retailers, the multiple investors are willing to pay should remain consistent IF the company consistently executes and sustains or grows its return on equity (gaining scale). In practice things are not so clear cut and as you can see with the two charts below, even though Bed Bath and Beyond has continued to reward its shareholders with consistent ROI, the P/E multiple on its stock has decline.
The business has been growing on the top line although the margins have declined slightly that the company ascribes to increased coupon usage.
From a balance sheet perspective, the company has $785 million in cash and a current ratio of 2.2 which is acceptable as a measure of liquidity. The company also operates at zero debt levels and that is something that concerns me a little. Pure equity as a source of capital is more expensive then debt and some leverage (specially in this climate of low cost debt) is advisable to improve the returns for the shareholders.
On the other hand, organic expansion using cash from the business shows conservative management and a great execution. The company continues to open new stores and concepts and is opening 2 Home and More stores in Mexico City (joint venture). Additionally, by acquiring Cost Plus, and with the bankruptcy of Linens and Things, the competitive climate for Bed Bath and Beyond has eased. BBBY is also stepping into the B2B segment with its acquisition of Linen Holdings, a business-to-business distributor of a variety of textile products, amenities and other goods to customers in the hospitality, cruise line, food service, healthcare and other industries.
For the next five years, the company is expected to grow by 12% which is par for the industry.
The company is aggressively repurchasing its own stock. Its Board has authorized another tranche of $2.5 B in stock buybacks so clearly the company believes that the stock is undervalued. The stock does currently trade at historically low valuations. The retail environment is now improving in the US that should help the top line and the bottom line. However, if you buy this stock, you are not buying it for its history and going forward given its position in the industry and the industry growth rates, it appears to me that the stock is currently fairly value.
We can talk numbers and multiples all day but at this level of valuation the question becomes whether the company has a competitive position in the market that is defensible. It is able to differentiate its offering compared to a Walmart or Target and that helps it generate 2-3 times the operating margin of these companies, but unless the company embarks on a major expansion this advantage will erode. Its recent acquisitions are a good step towards this but are probably not enough. And given that the management is buying back stock, it clearly feels that there is no other better use of the shareholder capital in front of them.
Absence of a significant growth initiative, Bed Bath and Beyond is a neutral stock today. If you buy it, you will probably match the market returns over long term.