Shares of Bed Bath & Beyond (BBBY) continue to show strong momentum through 2013, setting fresh all time highs in the wake of its second quarter results. The well-led company continues to grow at an impressive pace, on the back of a strong housing market.
The valuation looks fair at these levels. Therefore I remain on the sidelines after shares have witnessed strong momentum. A lack of short term triggers make me hesitant to invest at these levels.
Second Quarter Results
Bed Bath & Beyond generated second quarter revenues of $2.82 billion, up 8.9% on the year before and in line with consensus estimates of $2.81 billion.
Net earnings rose by 11.1% to $249.3 million, as share repurchases resulted in more spectacular earnings per share growth.
Earnings per share rose by 18.4% to $1.16 per share, beating consensus estimates by a penny.
Looking Into the Results..
Revenue growth was driven by store openings and acquisitions, but the 3.7% increase in same store sales was solid as well, accelerating slightly from the 3.5% reported a year earlier. Comparable store sales were driven by greater traffic and average sales per transaction.
The company experienced a bit of gross margin pressure as margins fell by 40 basis points to 39.43%. Gross margins pressure was related to an increase in coupon redemptions and amounts, as well as an unfavorable shift in the product mix.
Selling, general & administrative expenses fell 11 basis points to 25.63% of total revenue.
Net profit margins are up 18 basis point to 8.83% on lower taxes. Earnings per share growth was solid as the company retired some 6% of its shares over the past year.
.. And Looking Ahead
Third quarter earnings are seen between $1.11 and $1.16 per share. This compares to earnings of $1.03 per share last year, and consensus estimates of $1.12 per share. Sales are expected to grow at a healthy rate of 7 to 9%.
Fourth quarter earnings are now seen between $1.70 and $1.77 per share which compares to last year's earnings of $1.68 per share, and consensus estimates of $1.83 per share.
Bed Bath & Beyond ended its second quarter with $920.5 million in cash, equivalents and investments. The company operates without the assumption of debt, for a solid net cash position.
For the first six months of 2013, the company generated revenues of $5.44 billion, up 13.0% on the year before. Earnings rose by 4.8% to $451.8 million.
Full year earnings are seen just above the $1 billion mark, expected to come in between $4.88 and $5.01 per share, while analysts were looking for full year earnings of around $5.01 per share. Full year revenues could come in around $11.7 billion.
With shares exchanging hands at $78 per share, the market values Bed Bath & Beyond at 17 billion, or its operating assets around $16 billion. This values operating assets of the firm at 1.4 times annual revenues and 15 times annual earnings.
Bed Bath & Beyond does not pay a dividend despite the solid cash balances and profitability. Instead it has opted for share repurchases in order to return cash to its shareholders.
Some Historical Perspective
During most of the past decade, Bed Bath & Beyond has been a dormant stock. Shares gradually fell from $40 in 2004 to lows of $20 in 2008. From that moment in time, shares have gradually gained ground, trading at fresh all time highs around current levels of $78 per share.
Between the fiscal year of 2009 and 2012, Bed Bath & Beyond has increased its annual revenues by a cumulative 39% to $10.91 billion. Net earnings advanced by 73% to $1.04 billion.
Instead of paying dividends, the company opted for share repurchases, retiring over 15% of its shares outstanding over the past years, thereby boosting earnings per share growth. Given the large move upwards in the share price, the company has made a wise choice.
Bed Bath & Beyond continues its impressive momentum through this year, as shares are trading with year to date gains of 40% when factoring in the positive reaction to the second quarter results.
The continued recovery in the housing market is really filtering through to companies like Bed Bath & Beyond, but also home improvement retailers like Home Depot (HD). Note that household goods retailers fair relatively well while apparel and general food retailers have seen some pressure this summer.
Reported growth rates were driven by two minor acquisitions which the company made last year, and will result in more difficult comparable revenue growth rates in the second half of this year. Note that the company bought Linen Holdings for $105 million and World Market for $495 million in the first half of last year.
For now the company is steadily moving along, investing in its websites, while making modest acquisitions, and continuing to open new stores. The company currently operates 1,487 stores of which little over a 1,000 stores carry its namesake brand. Note that the company still sees much potential going forwards to expand its national store base.
So overall a pretty nice business and franchise at a fair valuation of 15 times earnings. The company is steadily growing through store openings, small acquisitions and same store sales growth. Earnings per share growth has been even higher, as the company executed on well-timed share repurchases in recent years.
The valuation seems fair to me at current levels. After the significant momentum, which has been driven by solid operating performance and the housing recovery, I remain on the sidelines.
I see few triggers for further gains in the short run.