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The Bed Bath Debate Continues

It wasn't easy, but Bed Bath & Beyond (Nasdaq: BBBY  ) just logged its 15th straight year of earnings gains. That's not bad, seeing as the streak dates back to when the company first went public. But investors are only interested in what lies beyond for Bed Bath, which is currently debatable.

Our recent Fool by Numbers will walk you through the aisles of Bed Bath's fourth quarter, in which there was a nice 18.4% jump in net sales, a 5.2% same-store sales increase, and a 7.5% gain in reported earnings. Results for the full year were similar and would have been slightly higher if it weren't for a small charge related to protecting employees from potential IRS tax consequences.

The results were respectable but not spectacular, and this troubles investors who had grown accustomed to at least 20% annual advances in sales and earnings. The current concern is that growth and profitability trends will continue to head south. These are valid worries; fellow Fool Rich Smith recently highlighted Bed Bath's falling net margins, and a recent bearish argument in a Dueling Fools segment questioned the company's long-term competitive advantage in a crowded retail industry.

I wasn't enthused by Bed Bath's 7% year-over-year drop in operating cash flow and 44% jump in capital spending. That's not a good free cash flow trend, and it could definitely signal that the company is spending more to withstand the constant advance from larger retailing competitors. Wal-Mart (NYSE: WMT  ) is legendary in its ability to use scale and logistics to keep costs down, while Target (NYSE: TGT  ) and Costco (Nasdaq: COST  ) work the other angle in selling "cheap chic" to the masses. Smaller home-furnishings peer Pier 1 (NYSE: PIR  ) may not even survive the onslaught, and Cost Plus (Nasdaq: CPWM  ) has also seen better days.

Despite its diminishing operating cash flow and recent capital spending spree, Bed Bath is holding its own by still generating more than ample free cash flow to fund expansion and buy back its shares. In December, management announced an authorization for a cool $1 billion in stock repurchase, which signals management's continued confidence in the future financial performance and long-term growth prospective.

While the company takes pride in its debt-free balance sheet, its cash and short-term investments worth approximately $3 per share, and its 20% return on capital, its growth and profitability may indeed be slowing. However, Bed Bath is still expanding its store base by 10% annually and can likely double its overall store count. Sure, the company will have to grow about 10% per year for another decade just to justify the current stock price, but the risk/reward trade-off doesn't look too bad at current levels.

Bed Bath's forward price-to-earnings multiple is less than 20; just a few years ago, it traded in excess of 40 times earnings. I'll leave it up to you to determine if the lower multiples and stagnant stock price offer sufficient offsets to decelerating growth prospects, but there is definitely a case to be made for either side of the argument.

For related Foolishness:

Bed Bath & Beyond is both aStock Advisor and anInside Value recommendation, while Costco is a Stock Advisor pick and Wal-Mart an Inside Value selection. Take a 30-day trial or two to any Fool newsletter today -- it's hard to argue with the price when it's free.

Fool contributor Ryan Fuhrmann is long shares of Bed Bath but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.

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