Bed, Bath & An Intriguing Bargain by Andrew Bary
Highlighted companies: Bed, Bath & Beyond (BBBY), Target (TGT), Kohl's (KSS), Home Depot (HD)
Summary: Bed, Bath & Beyond (BBBY) claims one of the retail industry's best growth and profit margins. Since its IPO in '92, revenues are up 30 fold, profits 35 fold, and shares have gone from $1 to $39. 2007 sales were $6.5 billion; its nearest competitor, Linens & Things, had $2.4b. Wall Street's concerns include how the housing slump will affect revenues (BBBY's '07 guidance is for 10% growth vs. 12% in '06), rising expenses and narrowing margins, and an options backdating scandal that's costing the company $74 million. But hedge funds and value investors like Cibelli Management and Sequoia have big positions. They like: 1) A low P/E ratio (18x) of for '07 and 16 for '08. 2) Good management with consistent growth in sales, profits and clientele. 3) Its chief competitor, Linens & Things, is struggling. 4) BBBY is an LBO candidate because of its high returns, moderate market cap ($11 billion), $1b in cash, no debt. Its founders own enough (4%) shares to influence buyers, but not enough to block one. 5) The company uses its 9% after-tax profit-- double that of Target (TGT) and better than Kohl's (KSS) and Home Depot (HD)-- for growth and buybacks (they're in the middle of a $1 billon one now), not dividends. Bottom Line: BBBY's double digit growth is still impressive. Along with a low P/E going forward, the stock could rise to the high 40's.
Related: Bed Bath and Beyond Needs To Unlock Value; Bed Bath & Beyond Q3 2006 Earnings Call Transcript; Bed Bath & Beyond Post-Earnings: Taxes, Operations and Guidance; Bed Bath & Beyond Earnings: Gross Margins Are Impressive; LBO Fever -- Barron's Looks at Who May Be Next; Bed Bath & Beyond's Backdating Rationale