Bed Bath to Go Above and Beyond - Barron's

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Includes: BBBY, PIR
by: Rachael Granby

Shares of Bed Bath & Beyond (NASDAQ:BBBY) have outpaced rivals' over the past year, but investors shouldn't cash out yet, writes Barron's Lawrence C. Strauss. The stock could climb another 25% in the next year.

Despite the rough economy, Bed Bath is picking up market share and, in the process, boosting earnings. It also boasts superior productivity, with sales of $225 per square foot in the last fiscal year vs. $120 per square foot at rival Pier 1 Imports (NYSE:PIR). Vendors like Bed Bath too, because it's a large retailer that provides a chance to "win mind share with the consumer."

The company has made several acquisitions but is best known for its 937 core stores in the U.S., Canada and Puerto Rico offering quality goods at a decent price. Bed Bath relies heavily on women shoppers and is expanding its bridal, baby and gift registries.

Bed Bath looks financially healthy, with a debt-free balance sheet that has $855M in cash and equivalents and $210M of illiquid auction-rate securities for which it expects a full recovery of value. Backing out the roughly $4/share in cash, Bed Bath's P/E ratio is 15.8. The company sees earnings of $1.59/share as a reasonable estimate for this fiscal year.

Bed Bath has been successful at cutting costs, and though its aggressive matching of Linens 'N Things' discounts hurt margins, it also put Bed Bath's main competitor out of business. Bed Bath's operating margins in the latest quarter were 8.4%, up 1.2 percentage points from the year before. Analysts say the company can improve margins to at least 11-12%.

The company also has good growth prospects, with plans to open 57 Bed Bath stores this year and room for up to 400 more in the U.S. and Canada. Its buybuy Baby chain also has promising growth prospects.

  • David Fording, of William Blair Growth Fund, thinks Bed Bath is "a high-quality company with lots of financial flexibility." Shares are worth $40 vs. a recent $32.65.
  • Colin McGranahan, of Bernstein Research, has an Outperform rating on the stock and a 12-month target of $40.
  • Gary Balter, of Credit Suisse, rates the stock Outperform and has a 12-month target of $37.

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  • Bed Bath & Beyond: Q1 EPS of $0.34 beats by $0.09. Revenue of $1.69B (+2.8%) in-line. Same-store sales down 1.6%. (PR)
  • Time's Sean Gregory thinks Bed Bath & Beyond may be a leading indicator. "Call it the Bed Bath & Beyond barometer. Some recent data indicate that as consumers prepare to open up their wallets, they'll be very likely to spruce up their homes."