Bed Bath & Beyond Looks Ready to Plummet

Let me first start with my macro view on the current state of the US consumer:

We have a 70% consumer based economy, and roughly 20% of the average US household’s net worth was wiped out in 2008. In addition, for the first time since WWII, the consumer price index, producer price index, and wages are falling at the same time. Add in job losses of over 5 million in the past year, fear of future job losses and real estate prices still getting battered, the US consumer is finally starting to delever, pay down debt and guess what? Save.

The US consumer is saving over 4% now, and the rate is rising. I believe this is a paradigm shift for the US consumer. We will not go back to 2003-2007 spending levels because as you know, the expansion was dependent on leverage and credit, both contracting at alarming rates now. The deleveraging process along with an increasing savings rate will result in a prolonged consumer spending slowdown that will NOT return to pre-recession growth rates.

Now how does this apply to retail specifically to Bed Bath & Beyond (BBBY)? Well, the gangbuster days of opening up new stores for future earnings growth are coming to an end. What does that leave us? We will be left with comparable store sales growth, but the problem is there isn’t any growth. BBBY had almost -5% same store sales growth as of Feb ’09 even with the Linens N Things bankruptcy! Same store sales growth is expected to remain negative for the remainder of 2009 according to Barclays Capital while new store openings will account for ALL the growth expected through 2010.

Bed Bath & Beyond plans to open up 54 new stores in the next year. Good idea? Hardly. As same store sales continue to decline, BBBY will be forced to close their unprofitable stores, while new store openings will slow down considerably or come to a halt completely. There is no way BBBY makes their future earnings if new store openings slowdown even a hair.

In addition, BBBY will continue to face pressure to decrease prices and continue heavy promotional coupon mailings to compete with other mass merchants and discounters. My personal opinion is BBBY will continue to lose share over time to Target (TGT), Wal-Mart (WMT) and other home furnishers. Linens N Things going bankrupt was just a sign to me that consumers are opting for alternatives and bigger one-stop shopping places just as small hardware stores died out to the Home Depots (HD)and Lowe's (LOW) of the world. I believe it is a sign of a broken business.

Financials

The balance sheet of BBBY is in good shape. My sole basis for being short is on future earnings potential. Currently, the trailing P/E for BBBY is 17 while earnings per share are $1.64. Considering EPS growth over the past five years is 4.63% and my thesis on a paradigm shift in lower consumer spending, I think multiple earnings contraction is likely in the future. Putting a conservative P/E of 12 on BBBY and assuming earnings per share grow at 5% in 2010 to $1.72 (which I think in no way happens!), you are left with a stock price of $20.66, even with a P/E of 16, you have a stock price of $27.50. There is absolutely NO margin of safety being long BBBY right now at $28 a share. Zip.

What do I think the stock is worth? Let’s slap BBBY with a more appropriate P/E of 10 and assume EPS will decrease at LEAST 10% next year as new store openings WILL NOT hit their goal, while same store sales will continue to decrease. You will be left with EPS of $1.48, and a stock price of 14.80 almost 50% below the current price.

With strong headwinds on my side including: a broken business, battered consumer, and continued weak housing market, I will continue to short more BBBY if it rises.

Outlook: Couple of years

Disclosure: I have established 60% of my desired short position. 325 people follow my portfolio on kaChing. (I have 47% returns in the last 13 months with very low risk).

Comments

[Jason Tillberg:]

Time is on your side with being short. I think when the next round of the credit crisis hits, and it will, retail will get a huge slap in the face. The P/E of 10 this year I would say is fair. Good write up.

Also short BBBY.

Jun 01 01:57 PM

[User 423606:]

Linen n Things' closing was a short-term negative for BBBY because consumers were diverted to the store-closing sales, but long-term it is a positive.

Jun 01 04:21 PM

[Theta Guy:]

I agree with your economic assessment but am not so sure about your position on BBBY. New store openings, and the closing of less profitable stores is frequent in retail. Generally the new stores generate higher sales per square foot due to the higher quality locations and improvements in updated store design.

You mentioned the balance sheet is strong and that alone makes many other retailers better candidates for the short play. Companies like Ann Taylor (ANN) or Quiksilver (ZQK) are in much more perilous situations.

I'm not saying that your short won't work...but if I was doing it, I might sell puts against the short for some extra protection.

Jun 01 05:27 PM

[levi:]

But how does the fact that their new store openings are in Buy Buy Baby format - different market that is expanding?

Jun 02 01:20 AM

[Dan Carroll:]

Buy Buy Baby only accounts for less than 15% of their new openings in the next year. Regardless, they won't hit the Bed Bath number of 40 new openings by this time next year...no way no how

Jun 02 02:28 AM

[DonFurio:]

BBBY has performed really well in this downturn, and some of its competitors are gone. You may not get busted bc the stock has already had a big move up, but I don't think this one will come crashing down either.

Jun 03 02:52 AM