Bed Bath & Beyond - Worth Buying On Declines
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Bed Bath and Beyond's (NASDAQ: BBBY) first quarter of fiscal 2012 was a huge disappointment, with comps growing only 3% and Bed Bath ratcheting down expectations to low single digit earnings growth for fiscal 2012. Its stock price dropped almost 20% from its peak of $ 75.84, and has since stabilized in the low sixties.
From fiscal 2008 to 2011, in spite of a weak housing market, Bed Bath had held its own, growing revenues at a CAGR of 7.7% and net income 15%, fueled mainly by the demise of Linens 'N' Things, which filed for bankruptcy in 2008. Additionally, the 2008 - 2011 slow down reduced the number of home furnishing stores by about 13 to 15%, driving many of Bed Bath's competitors out of business.
Bed Bath needs to address these concerns to continue growing
Comscore estimated that online shopping for home furnishings rose to double-digit growth last year, higher than the mid- to high-single digit growth the year before.
After Bed Bath's fourth-quarter results, analysts at Canaccord Adams said it marked the first time the home-furnishings retailer lost market share, primarily because of its limited internet presence.
Big brother Amazon (NASDAQ: AMZN) is always lurking with often cheaper merchandise and even though estimates place its home furnishings revenue at only $200 million, online websites such as Amazon may have already dented Bed Bath. Gross margins were down to 40% in Q1 of 2012 as compared to 40.6% a year ago. While Amazon doesn't hurt Bed Bath on revenue, Bed Bath sold $9.1 billion compared to Amazon's $200 million, it forces Bed Bath to compete on price, give discounts and spend capital on improving its web presence.
To defend this onslaught, Bed Bath resorted to extreme couponing, which will continue to depress margins, as shoppers use it as a proxy to mitigate the shipping cost of cheaper on line merchandise.
My take is that besides Amazon, Bed Bath will see more online competition with the proliferation of tablets; Google's Nexus and Apple's iPad will expand online share of the home furnishing market.
Lower comps growth also seems to suggest that the flagship chain is close to growing to the point of maturity.
Even as smaller home furnishing stores have gone out of business, competitors such as Family Dollar (NYSE: FDO) stores have picked up the slack, stocking merchandise similar to Bed Bath's. While Wal-Mart (NYSE: WMT) is not a major competitor as its selection of merchandise is much, much smaller -- on many occasions families pick up essentials such as mats, wash cloths, brooms, garbage bins, etc because of cheaper prices.
Why Bed Bath is worth buying on declines
With housing bottoming out and home prices stabilizing, Bed Bath should see a few better years ahead, with additional growth coming in from Cost Plus World Market's 259 stores and Linen Holding's merchandise - two companies Bed Bath acquired in 2012.
My take is that shoppers will not abandon Bed Bath for cheaper online merchandise for three reasons;
One - a substantial part of their and other home furnishing products are touchy-feely, an experience which, is not duplicated online.
Two - Many products are unique to Bed Bath and are not available online or elsewhere.
Three – The brick and mortar shopping experience also allows you to buy more on impulse, especially if you have your 20% discount coupon.
Bed Bath's management is thinking correctly -- increasing revenue by acquiring Cost Plus and adding Linen Holding's merchandise instead of opening more locations in a saturated market.
Shares are getting scarcer; Bed Bath bought back 6 percent alone in the past three quarters. Outstanding shares are 21% lower than 2004 and management is committed to buying another $ 613 million worth of shares.
Bed Bath is also committed to a new technology data center, an enhanced website and an 800,000 square feet e-commerce fulfillment warehouse to beef up its weak online credentials.
I don't own Bed Bath, but I would be interested in buying on declines, from $55 to $58, at about 12-13 times forward earnings, given that growth is likely to be in the low single digits. Bed Bath's forward PE stacks up similar to peers, Williams Sonoma (NYSE: WSM) at 13.6 and Pier 1 (NYSE: PIR) at 13.5.
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