Bed Bath & Beyond (BBBY) is a stock that has taken an absolute punishing from the market in the past year. At the time of this article the stock trades at $55.40 or about 2% above its 52 week low and over 25% below its 52 week high.
Analysts expect the company to earn right about $5 per share in the fiscal year ending February 2013. So at the current stock price Bed Bath & Beyond is trading at about 11x forward earnings.
I think Bed Bath & Beyond represents a compelling opportunity right here as the market has mispriced this company amid concerns about overall slowing sales as well as possible concerns about a small decrease in gross margin this current fiscal year compared to last. The opportunity for investors to step into a long position in the company and see significant gains from this price level are real.
Two critical items lead me to believe this company is poised to rebound in 2013. The first is the commitment to continue to repurchase shares. In the 9 months ended November 2012 the company retired close to 20M shares, which amounts to about 8% of the total shares outstanding. At the same time they announced a new $2.5B share repurchase program. Critics love to look at these huge share buyback announcements and make hay about how the company does not have nearly enough cash on hand to fulfill the repurchase program. The company has about $700M in cash on hand as of 11/30/12 and the chart below is intended to show you the cash flow generating power over the past 3 years.
|Cost of Sales|
Operating Cash Flow (OCF)
(less capital expenditures)
Cash Flow Available for Buyback / Acquisitions
If you take the operating cash flow generated by the company and deduct the capital expenditures necessary to expand the store count and continue investing in remodels, e-commerce, IT, etc… BBBY is generating close to $1B a year as of the last FY which is available for acquisitions and buy-backs. This year the company made some acquisitions as well as repurchased shares. So under the guise that the company does not even grow anymore they will generate enough cash flow in less than 2 years combined with cash on hand to complete the announced $2.5B share repurchase program at this stock price. That would amount to buying back about 20% of outstanding shares and would take the expected $5 EPS in FY 2013 and increase that to $6 of EPS.
Fundamentally I want to make this company a long-term holding due to its cash flow generating powers and commitment to reduce the outstanding shares.
The hidden gem buried inside of Bed Bath & Beyond is its growing presence in the baby/child market through the "buybuyBaby" brand. Currently they have about 78 stores (out of over 1,000 stores including their flagship store and other subsidiaries). In FY 2011 the company added 19 buybuyBaby stores and they have added another 14 through 9 months in FY 2012. Clearly the company believes in this brand as they are aggressively growing the store count each year.
The reason I believe buybuyBaby is the hidden gem and the growth engine inside of the company is due to the lack of competition at the higher end baby shopping experience. If you have children you have certainly been to a BabiesRUS, Wal-Mart, or Target at some point for the basic necessities. However I have noticed with increasing frequency that new moms, particular the affluent, are choosing to register at buybuyBaby versus the aforementioned stores. This registry for baby items will serve to breed loyalty to the brand for the parents as well as expose those purchasing the gifts to the brand. There are over 250 BabiesRUS in the United States to give you an idea of the potential market for the buybuyBaby expansion.
The differentiator between buybuyBaby and its competitors is simply the customer service. The reality is that new parents generally have no clue what they need. Try walking into a BabiesRUS and you will be lucky to find someone to help you check out let alone tell you what type of car seat or stroller to purchase (clearly you won't even begin to have that expertise at Wal-Mart or Target). The assortment or product at buybuyBaby matches or exceeds that of BabiesRUS and the experience, store appearance, and customer service blow the competition out of the water.
The beauty of this brand having such a runway for growth within the Bed Bath & Beyond portfolio is that children, once you have them, are pretty much recession proof. They need food to eat and that great disposable product for their bellies to dispose of that food. They miraculously grow out of their clothes every 6 months. They need nurseries with furniture that will eventually turn into big boy and girl rooms with even bigger furniture. Look at a company like Carter's (CRI) that is valued at an EPS of almost 24 with a market cap of $3.5B. Companies that make products for babies are valuable and hold up extremely well in good times and bad.
While Bed Bath & Beyond and the flagship stores will continue to grow you can argue that people may decide they don't need a new Keurig machine or Linens when the economy hits a rough patch. But thankfully for them no matter how good or bad the economy is they are investing today in a business that is generally stable in good times or bad and whose stores offer a superior experience to the only other large standalone bricks and mortar baby retailer in the market place.