Bed Bath & Beyond (NASDAQ:BBBY) has a key quality of managing its margins to maintain net earnings growth. The company's stock is able to perform very well on grounds of the sound fundamentals it has. The market has always treated the stock as high quality. The stock has gained about 16% since the start of 2013, and has built a solid platform to further outperform the market.
Bed Bath & Beyond is a chain of domestic merchandise retail stores across the United States, Mexico and Canada. In this segment, it competes with players like Wal-Mart Store (NYSE:WMT), Target (NYSE:TGT) and Macy's. Recently, it announced the results for the quarter ended in the month of March, 2013.
Quarter results- High growth and margin
Highlights: Net sales for the fourth quarter (fourteen weeks) of 2012 was approximately $3 billion. This is an increase of about 25% from net sales of $2.8 billion reported in the fourth quarter (thirteen weeks) of 2011. Net Earnings per diluted share of the company saw a jump of 14% from the same quarter a year ago. The Earnings per share of the company have been increasing at the rate of 16% during the last 10 years.
- An increase in the margins: With gross margin of 0.41 and operating margin of 0.16, the company has made a further improvement in its EPS.
- Return on capital employed was more than 25%: For a company, distributing no dividends, this is a very remarkable return. Also, it gives a reason why the company should hold the cash for its growth rather than distributing it to its shareholders.
During Q4 2012, the company repurchased approximately $300 million of its common stocks, representing 5.3 million shares. It is still to repurchase approximately $2.4 billion. Programs like this help in increasing the book value of the stocks and with a price to book value ratio of about 3.5, this stock shows more potential to grow.
Bed Bath & Beyond operates 1469 stores in all the 50 states of the U.S. The other 400-plus stores include World Market, which sells home furnishings, wine, and gourmet food; the fast-growing BuyBuy Baby chain, Christmas Tree Shops, and Harmon discount shops.
The company sells a wide range of products under the following categories:
- Domestic merchandise: bed lines, bath items and kitchen textiles
- Home furnishing: kitchen and table top items fine table top, basic house wares and general home furnishing
- Linen Holdings: textiles products, amenities and other goods
Under each category, its major competitors are Target and Wal-Mart. Operational policy of Target is to sell high-quality products at a lower cost rather than selling low-cost products. Though this quality gives Target a unique market segment, it has to operate under a stressed operational margin.
Intelligent use of its cash resource
For expanding and increasing its product portfolio, Bed Bath & Beyond acquired Linen Holdings and World Market in 2012. However, the significant factor was the company did not consider raising funds by debt for its operational growth purpose. It used its cash balance to make these acquisitions (cash and equivalents were reduced by approximately 50% during the last year). The total long-term debt of the company remained at a constant level. This factor was the main reason for the company to have higher net profit margins over its competitors.
Considering the company's operational expansion and the decent margins maintenance, investors can expect the stock to perform positively not only throughout this year but also in the long run.
Fundamentals of the company vis-à-vis competitors
In comparison with its competitors, Bed Bath & Beyond is relatively small in terms of market capitalization. However, the fundamentals of the company are very strong and it has significantly better P/E and P/S figures over its competitors.
- Wal-Mart - has a policy to provide its customer with the lowest price possible. With the return of its Great Gas Rollback program, it is coming up with a way to help customers save their fuel. The company is going completely green with its commitment to increase use of renewable energy. It reported diluted EPS of $1.67 and a total revenue of $127 billion, in the last quarter of fiscal year 2013 (ending on January'13), a growth of 11% and 3%, respectively. Dividend yield of the company is 2.40% and the company does not follow a constant dividend-distribution policy. Therefore, investor should not expect a fixed amount of return in terms of quarterly or yearly dividend.
- Target - also operates at discount prices and offers further facilities to its loyal customers using the company's brand credit card. The company has recently revised its first-quarter guidance, which is short of expectations. For the last quarter of fiscal year 2013, the company reported total revenue of $22 billion and EPS of 1.46, an increase of 7% and 1.2%, respectively. Dividend yield of the company is 2.11% and the company has shown an average dividend growth of 25% over a period of five years.
- Bed, Bath & Beyond - is not a dividend stock, but its earnings have been spectacular. Total revenue of Bed, Bath & Beyond is growing at an average of 9% Q-o-Q (recent quarter increased by 25%), over the last five quarters. EPS of the company is growing at a rate of 16% (two of the most recent quarters have seen a growth rate of 25%).
Below is a table of comparison:
Market Cap (in billions)
Quarterly Revenue Growth (yoy)
These fundamentals clearly show the growth potential and the edge Bed Bath & Beyond has in comparison to its competitors.
Concern on maintaining the market share and margin
Though after the dilution of Linens'n Things, Bed Bath & Beyond is left with fewer competitors, but the major market share of this segment is still under the big names like Wal-Mart. Price competition is very high in this market. It is now facing a stiff competition on the online pricing front.
Industry challenges on margins-
The retail industry is highly competitive and gets affected by a number of factors like general economic conditions including the housing market, the overall macroeconomic condition, retailing environment consumer preferences and spending habits.
Especially, in the U.S. economy, the above mentioned factors are very fluctuating and have a very significant impact on the players of the retail industry. The future depends on relatively high unemployment, commodity prices and sluggish housing market. Under such an environment, this is difficult to predict the future outcome, and for Bed Bath & Beyond, it will also be tough to maintain the margin that it has been able to do so far.
The stock is fundamentally very strong and the company is expanding its operations, organically and inorganically. Though during the last year, the stock has broken about 20 percent, but it is performing very well this year. It is looking positive in the long run and investors can buy this stock in the medium to long term.