One of the Few Remaining Bargains in Retail
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the current bull market, much of the market is at or near 52-week highs, with many hitting record levels. The retail sector has done especially well in 2013, with increasing optimism about the employment situation in the U.S. as well as increased consumer confidence, which should lead to increased discretionary spending. As a result, the S&P Retail Index (NYSEMKT: XRT) is up over 25% since the beginning of the year, and many retailers have performed even better than that. In times like these, investors need to be extra selective in order to find the elusive bargains that remain. One of my current favorites in the retail sector is Bed Bath & Beyond (NASDAQ: BBBY), and let me tell you why.
With just over 1,000 stores, Bed Bath & Beyond is a leading chain of home accessories stores, and also operates several other brands. The company has grown tremendously over the past two decades, increasing their store count from 34 to 1,004 in that time period, in addition to completing several key acquisitions. Most notable were the 2003 purchase of Christmas Tree Shops ($194.4 million), the 2007 purchase of buybuy Baby ($67 million) and the 2012 acquisition of Cost Plus ($495 million), a company that is known for its World Market chain of stores.
Bed Bath & Beyond is not quite done just yet. The company has a long-term goal of 1,300 locations in the U.S. and plans to aggressively grow its presence in Canada over the next few years.
What surprises me is that after all of this aggressive growth, the company has a complete lack of debt. All of its recent growth, including the purchase of Cost Plus for almost half a billion dollars, was completely done with cash that was already on the company’s balance sheet. This is very impressive and is one of the best signs of healthy growth in a long-term investment prospect.
Still Cheap in a Land of Expensive Retailers
At just 15.2 times last year’s earnings, Bed Bath & Beyond is trading at a significant discount to its peers, as you’ll see in the “alternatives” section below. For the current fiscal year (2014), the company is projected to earn $5.00 per share, rising to $5.61 and $6.28 in FYs 2015 and 2016, respectively. This means that the analysts following the company expect an average annual earnings growth rate of 11.2% over the next three years, which is excellent for a company with a low P/E and no debt at all.
Alternatives: Big or Small
As an alternative to Bed Bath & Beyond, investors have the choice of comparable small home goods retailers, such as Pier 1 (NYSE: PIR) or large, more diverse retailers such as Target (NYSE: TGT), which is known for its low-cost but high-quality home furnishings and accessories.
I have written about Pier 1 a few times, and the company is the largest retailer of imported furnishings and home accessories in the U.S. Pier 1 is also one of the best rebound stories of the financial crisis, with shares currently trading for 250 times what they were at the lows. While I believe that Pier 1 has more growth potential over the long run than Bed Bath & beyond simply because they have saturated the market less, I think shares are a bit overvalued at their current levels.
At about 20.2 times TTM earnings, Pier 1 trades at a pretty high valuation for a company with a 12% forward growth rate. While the company does have a positive net cash position as well (more cash than debt), I would need Pier 1’s shares to pull back a bit before jumping in.
Target has been one of my favorite retailers for some time now, and their home furnishing and accessories offerings are hard to beat in terms of value for the money. Just take a look at how many college dorms are furnished with Target accessories! In addition, an investment in Target buys you exposure to their very diverse product line, so if home furnishing sales go sour, there are still many other revenue sources for the company.
Target trades at 16.5 times earnings, with 15% growth projected as Target aggressively pursues the expansion of its grocery business as well as its growth into Canada, where it expects to open at least 125 new stores this year. Target is also the only dividend payer of the three, and their 2.1% dividend yield is certainly worthy of consideration if income is a factor.
While I believe that many, if not most, of the retail stocks in the market have gotten a little bit ahead of themselves, Bed Bath and Beyond is still very cheap and offers incredible growth potential for the money. The company is definitely worth a look for those who may want to rethink the retail portion of their profile.
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Matthew Frankel 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!