As a value and growth investor, I am always on the lookout for undervalued companies in out-of-favor sectors as well as companies that offer sustainable growth prospects, and it's a rare occasion when you run across a company that appears to offer both.
With US economic growth slowing, and consumers once again scaling back spending, the retail sector has certainly taken its lumps recently, and even giants like Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and J.C. Penney (NYSE:JCP) have felt their share of the pain. But with a combination of continued sales and earnings growth, expansion through new store openings and acquisitions, and shares trading well off their 52 week high, home furnishings retailer Bed Bath & Beyond Inc (NASDAQ:BBBY) seems to offer just that sort of rare opportunity.
Bed Bath & Beyond Inc operates a chain of retail stores, selling a range of domestic merchandise, such as bed linens, bath items, kitchen textiles and accessories, and home furnishings and household products. The company operates 1,180 stores under the names of Bed Bath & Beyond, Christmas Tree Shops, Harmon and Harmon Face Values and buybuy BABY. The company was founded in 1971 and is based in Union, NJ.
Proven Track Record Of Sales and Earnings Growth
Bed Bath & Beyond recently announced solid 1st quarter 2012 earnings increases of 89 cents per share on revenue of $2.218 billion, beating analysts estimates of 85 cents per share, and up over 72 cents per share and $2.109 billion from 1st quarter 2011. First quarter same store sales did slow however to 3%, versus 7% in the prior year.
This strong performance from Bed Bath & Beyond should not come as a surprise. The company has managed to deliver exceptional top and bottom line growth over the last five years, with sales growing from $7.048 billion in 2008 to $9.499 billion in 2012 and net earnings almost doubling during that time, from $2.10 per share to $4.06 per share, despite operating in a very difficult economic environment.
Growth Through Expansion and Acquisition.
The company continues to execute its internal expansion program and has demonstrated a commitment to growth through acquisition as well. During the 1st quarter 2012, the company opened two new Bed Bath & Beyond stores, four new buybuy Baby stores and one new Christmas Tree Shop store in The US and Canada, and has plans for a total of 40 new stores across all brands in 2012.
The company has also recently completed acquisitions of discount retailer Cost Plus and commercial linen distributor Linen Holdings LLC, both of which will be accretive to 2012 earnings. Best of all, the company's solid balance sheet has allowed the company to finance its internal expansion program and recent acquisitions entirely in cash. The company currently has over $1 billion dollars in cash on hand, and zero debt.
For the last several years, Bed Bath & Beyond has been aggressively repurchasing shares of its common stock under the company's share repurchase program. Between 2004 and 2011, the company has repurchased approximately $4 billion of its common stock, and recently announced that during the 1st quarter of 2012, they repurchased another 4.6 million shares of common stock, at a cost of $306.3 million.
The stock has a significant level of insider ownership at 13%, and the company pays no dividend. Shares of Bed Bath & Beyond, are trading at $63.62 as of July 27th, and have traded between a 52 week low of $48.75 and a 52 week high of $75.84. The shares appear undervalued at a P/E of 14.98, which is fairly low for a growth company. With analysts expected 2013 per share earnings at $4.68, and assuming a more reasonable but still modest earnings multiple of 17, the shares should have the potential to reach the $80 level short term, a 20% return from current levels.
Given the softening economy and with consumer anxiety as high as it's ever been, retailers like Bed Bath & Beyond could face significant headwinds over the next year or so, and investors should do their own research before making an investment decision. But with a proven history of sales and earnings growth, continued expansion both internally and through acquisition, a strong balance sheet and an undervalued share price, Bed Bath & Beyond would appear to have plenty going for it, and was a recent bullish pick by Jim Cramer. I would feel comfortable starting a small position at current levels, and adding on any dips, with an $80 price target.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Additional disclosure: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. It is up to investors to make the correct decision after necessary research. Investing includes risks, including loss of principal.