Is This Retailer a Good Pick Now?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bed Bath & Beyond (NASDAQ: BBBY) has been a good stock for its shareholders, rising more than 35.2% and beating the S&P 500’s return of nearly 17.90%. Recently, the company has reported increasing revenue but lower profits in the first quarter of 2013. Famous investors Jim Simons, Chuck Royce and Scott Black have Bed Bath & Beyond in their investment portfolios. Should investors come in the company at its current trading price? Let’s take a closer look.

Higher revenue but lower earnings

Bed Bath & Beyond experienced a 17.8% increase in its sales in the first quarter, growing from $2.2 billion last year to $2.6 billion this year. The quarterly comparable store sales enjoyed growth of around 3.4%. Despite rising revenue, its net earnings came in at $202.5 million, a bit lower than the net earnings of $206.84 million in the first quarter of last year. The lower earnings in the first quarter of 2013 were due to a 24% jump to nearly $710 million. However, because of the share buybacks, its earnings per share actually grew from $0.89 per share to $0.93 per share. In the first quarter 2013, Bed Bath & Beyond spent around $324 million to buy back around 5 million shares. The remaining balance for existing share buyback program was around $2.1 billion.

What I like about Bed Bath & Beyond is its strong capital structure. As of June 2013, it had more than $4 billion in equity, $921.8 million in both cash and short-term investments, and no debt. The deferred rent and other liabilities came in at $493.7 million. Bed Bath & Beyond is trading at around $75.60 per share, with a total market cap of $16.5 billion. The market values the company at only 8.5 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization.)

Target and Wal-Mart experienced not-so-impressive first quarter earnings

Compared to peers such as Target (NYSE: TGT) and Wal-Mart (NYSE: WMT), Bed Bath & Beyond seems to be the most expensively-valued among the three.

Target is trading at $72.60 per share, with a total market cap of $46.60 billion. The market values Target at a lower valuation than Bed Bath & Beyond, at 7.7 times its trailing EBITDA. In the first quarter, both Target’s net income and revenue declined. While the revenue came in at $16.7 billion, the net income was only $498 million, or $0.77 per share, 28% lower than the net income of $697 million, or $1.04 per share in the first quarter last year. For the full year, it is expected to generate around $4.12 to $4.32 in EPS.

Wal-Mart also has a lower valuation than Bed Bath & Beyond. Wal-Mart is trading $77.20 per share, with the total market cap of $253 billion. The market values Wal-Mart at 8.3 times its trailing EBITDA. In the first quarter this year, Wal-Mart did not produce impressive operating results. Revenue increased by only around 1% to $114.19 billion, while the net income climbed up only 1.1% $3.78 billion. However, its earnings per share experienced a much higher growth, at 4.5%, than net income, to arrive at $1.15. This earnings per share growth was mainly due to its share repurchases in the first quarter. During the quarter, Wal-Mart bought back 30 million shares, with the total transaction value of around $2.2 billion. It also paid out $1.6 billion in dividends, bringing the total cash return to shareholders to $3.8 billion in the first quarter. In the second quarter of 2013, the retailer is estimated to generate around $1.22 to $1.27 in earnings per share.

What is the best pick now?

In order to compare the companies, let’s look at their operating metrics:

<table> <thead> <tr><th> </th><th> <p><strong>Bed Bath & Beyond</strong></p> </th><th> <p><strong>Target</strong></p> </th><th> <p><strong>Wal-Mart</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>26.2</p> </td> <td> <p>6.3</p> </td> <td> <p>12.3</p> </td> </tr> <tr> <td> <p><strong>Dividend yield (%)</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>2.4</p> </td> <td> <p>2.4</p> </td> </tr> <tr> <td> <p><strong>EBITDA multiple</strong></p> </td> <td> <p>8.5</p> </td> <td> <p>7.7</p> </td> <td> <p>8.3</p> </td> </tr> </tbody> </table>

Income investors might like Target and Wal-Mart with their good dividend yields of 2.4% while Bed Bath & Beyond does not pay any dividends. What attracts me the most to Bed Bath & Beyond is it’s high profitability, with the highest return on invested capital (ROIC) of the three companies at 26.2%. Wal-Mart’s ROIC was less than half of Bed Bath & Beyond’s at only 12.3% ,while Target was the least profitable business with the lowest ROIC at 6.3%. As a result, Bed Bath & Beyond could demand the premium valuation.

My Foolish take

As Bed Bath & Beyond has a strong balance sheet, high profitability, a reasonable valuation and potential share buybacks to return cash to shareholders, I personally think that this retailer is a good long-term pick for patient investors. Income investors could also choose Wal-Mart because of its market-leading position, good profitability and decent dividend yield.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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