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A Hidden Treasure In Your Home

|About: Bed Bath & Beyond Inc. (BBBY), Includes: BIG, PIR, TGT, TJX, WMT, WSM
Summary

Bed Bath and Beyond (BBBY) has fallen significantly over the last year, but the prospects for growth still remain.

Analysis of the strengths/weaknesses and future prospects reveal that the company may have a bright future.

DCF and relative valuations suggest that the company is currently undervalued.

OVERVIEW

Bed Bath and Beyond, Inc. (BBBY) is an American retailer primarily based in retail stores that sells bedding, kitchen, storage, cleaning, and decorative products, as well as other household items. The business was created in 1971 by Warren Eisenberg and Leonard Feinstein, originally specializing in bathroom and bedroom products. The parent company now includes subsidiaries such as Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, Harmon, Harmon Face Values, Buy Buy BABY and World Market, Cost Plus World Market, as well as online retailers One Kings Lane, Of a Kind, PersonalizationMall.com, and Chef Central. As of March, the company operates in 1,533 stores overall (including subsidiaries) in the United States, Canada, and Mexico.

PRICE ACTION

In the last 12 months, BBBY stock has fallen 43%, from $18.15 in September 2018 to $10.35 upon closing on September 6th of this year, reaching a 52-week low of $7.31 in mid-August. The reason for this drop is five-fold:

  • In April, the company declared its 2018 Q4 results—year-over-year revenue fell by 11% and comps fell 1.4%, resulting in an 8% drop in stock

  • Ten days later, the stock fell again—4%—after the company announced changes to the board, with co-founders Eisenburg and Feinstein stepping down

  • In mid-May, shares fell 6% on the news that CEO Steven Temares stepped down due to investor pressure

  • In July, despite the company’s 2019 Q1 earnings slightly edging expectations, the stock fell by 8% again due to a 6.6% drop in same-store sales and revenues

  • However, shared have rebounded from mid-August to early September (about 15%) on the news of the company hiring Goldman Sachs to explore selling some of its core businesses

STRENGTHS

  • Kitchen/bedding products are necessary, leading to steady customer stream and high revenue

  • Diverse subsidiaries—wide range of products

    • buybuyBABY has realized consistent revenue growth in the last two years despite the company as a whole seeing a steady decline

  • E-commerce opportunities with One Kings Lane, Of a Kind, PersonalizationMall.com, and Chef Central

  • International growth prospects beyond North America once stable profit level is reached

WEAKNESSES

  • Over-distribution of coupons/promotions has negatively impacted operating/profit margins

  • Revenues tethered to seasonal spending/new homeowners (volatile customer stream)

  • Easy/inexpensive for customers to switch to competitors, particularly online vendors

  • Detrimental management decisions, leading to recent disruption in board and departure of CEO

FUTURE PROSPECTS

In early September, the company hired Goldman Sachs to consider possible deals relating to its subsidiaries, such as Cost Plus World Market and PersonalizationMall.com, leading many to believe that the company is yielding to investor pressure. However, in terms of future internal changes to the company, interim CEO Mary Winston outlined a specific plan during the most recent earnings call and a letter to shareholders last week.

  • Eliminating certain coupons and/or adding minimum purchase limit to use certain discounts

  • The company will continue its search for a permanent CEO and expects to find one “in the coming weeks”

  • Remodeling 160 of 1,100 stores better shopping experience, or “rapid refresh”

  • Reduce inventory by up to $1 billion in the next 18 months

  • Accelerate process of closing/relocating underperforming stores

  • Workforce reductions

  • Reworking lease renewal agreements

Sources: Forbes, Motley Fool

DCF VALUATION

Assumptions

Given the company’s future outlook established by the above plan and current financials, these are the assumptions/estimates for future growth within the company:

  • A slight decline in revenue in the short-term given that the company has seen this decline in the last several quarters, on top of the market factor of a recession

    • Coupled with slight revenue growth after 5 years and terminally

  • Growth in the operating margin given that the company plans to reduce inventory, workforce, and coupons going forward

    • Coupled with convergence to sustainable level after 5 years and terminally

  • Cost of capital assumes a long-term risk-free rate of 2% (10 year Treasury rate as of this week—also assumed for the next several years)

    • Assuming slightly lower cost of debt given re-structuring of lease agreements

    • Assuming that terminally, the company’s WACC will approach a constant seen in typical mature companies

Inputs

Revenue growth for next 5 years

-1.5%

Revenue growth beyond 5 years

2%

Pre-tax operating margin for next 5 years

Growth to 7%

Pre-tax operating margin beyond 5 years

7%

Weighted average cost of capital 

7%

Output

Total value of equity

$3,389,489.92

Estimated value of shares

$26.53

Current price as a % of estimated value

41.17%

Key Ratios Comparison 

Competitors: Target, Walmart, TJX HomeGoods, Williams-Sonoma, Pier 1 Imports, Big Lots Inc.

Current Ratios

Price/Earnings (P/E)

Price/Sales (P/S)

Price/Free cash flow (P/FCF)

Price/Book (P/B)

EV/EBIT

EV/EBITDA

BBBY

N/A

0.12

3.11

0.66

12.40

6.14

Target (TGT)

18.04

0.74

18.83

4.75

15.40

9.8

Walmart (WMT)

26.13

0.65

19.92

4.73

18.93

12.49

TJX HomeGoods (TJX)

22.86

1.76

30.75

13.14

18.30

15.24

Williams-Sonoma (WSM)

15.67

0.94

21.98

4.83

15.29

10.81

Pier 1 Imports (PIR)

N/A

0.01

3.99

N/A

180.01

13.93

Big Lots (BIG)

7.52

0.17

1.4

19.35

14.58

6.22

Data: Morningstar, Yahoo Finance, GuruFocus

In general, a cursory glance at these ratios indicates that Bed Bath and Beyond seems generally undervalued when looking at price to earnings, sales, book, and FCF, as well as EV/EBIT and EV/EBITDA.

EV/EBITDA (Relative) Valuation

Using the average EV/EBITDA of the competitors and adjusting to BBBY’s EV/EBITDA can give us a reasonable estimate of the company’s value. The average EV/EBITDA of the above competitors is 11.415, but to be slightly more conservative, using a value of 11 and multiplying by BBBY’s current EBITDA results in an adjusted EV of $7.466 billion. Next, subtracting the debt (including operating leases), we get an estimated market cap of $3.541 billion, or a share price of $27.72.

However, using a slightly lower multiple of 10 means a cash-on-cash return of 10%, a more reasonable estimate (in an environment where the 10-year Treasury gives a 2% yield, or a multiple of 50). Using this multiple, we get a new enterprise value of 6.7876 billion. If we then subtract the debt (using, again, a conservative approach by including operating leases), we get a market cap of 2.8626 billion. Finally, dividing by the number of shares, we get an estimated share price of $22.40.

Thus, using a competitor-adjusted EV/EBITDA valuation results in a range of approximately $22 to $28 for BBBY’s share price.

Average competitor EV/EBITDA

11.415

Per share value using EV/EBITDA of 10

$22.40

Per share value using EV/EBITDA of 11

$27.72

Conclusion

Using the two quantitative valuation metrics and a qualitative look at the comparative financial ratios among the competition, Bed Bath and Beyond is most likely worth significantly more than its current price, despite the fact that the stock has rebounded by about 15% in the last two weeks. Moreover, according to Yahoo Finance, if the company does sell off several of their subsidiaries, they would receive $1.4 billion, or $10 per share, meaning that the rest of the business is, in essence, free, further illustrating that the company is deeply undervalued as of today. Ultimately, using the DCF and the competitor-adjusted EV/EBITDA valuation, Bed Bath and Beyond is most likely worth between $22 and $28—more than double of the current stock price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My father's private partnership is long BBBY.