Is Bed Bath & Beyond a Good Investment After a 13% Drop?

Bed Bath & Beyond could be a good stock to own in the long run, but how does it compare to its much bigger peers Target and Macy's?

Jan 16, 2014 at 3:52PM

Recently, Bed Bath & Beyond (NASDAQ:BBBY) experienced a significant drop of as much as 13% due to its disappointing full-year outlook. After the drop, Bed Bath & Beyond is valued at only 13 times its forward earnings. Should investors stay away from the company because of the sluggish earnings outlook, or is Bed Bath & Beyond a better buy with its lower market price than larger peers such as Target (NYSE:TGT) and Macy's (NYSE:M)?

Reducing operating outlook
In the third quarter, Bed Bath & Beyond earned more than $2.86 billion in sales, only 6% higher than the revenue of the third quarter of the previous year. Net income rose by nearly 2% to $237.2 million while EPS enjoyed higher growth at 8.73%. The higher growth was mainly due to the company's share buyback activity--during the current quarter, it bought back around 2.3 million shares for $171 million.  As Bed Bath & Beyond does not pay dividends to its shareholders, it returns cash only by repurchasing shares. Over the past two years, it has returned around 86% of its operating cash flows.

The company lowered its EPS outlook for the fourth quarter from $1.70-$1.77 range to a $1.60-$1.67 range. In addition, for the full year the company reduced its guidance from $4.88-$5.01 to only $4.79-$4.86. 

What might drive Bed Bath & Beyond forward
Although the market showed its pessimism about the company, investors should feel safe because of its strong balance sheet. As of November 2013, it had nearly $4.13 billion in equity, $471 million in cash, and no debt. Bed Bath & Beyond has a much more conservative capital structure than either Target and Macy's. While Target had nearly $14.7 billion in both short and long-term debt, the total debt of Macy's came in at more than $7.1 billion.

Bed Bath & Beyond still enjoys a competitive advantage in the retail industry because of its wide range of interesting merchandise offerings. Because of its decentralized management culture, Bed Bath & Beyond can customize its merchandise assortment to better suit customers' shopping preferences. The company will keep driving its business forward with several major initiatives including enhancing its omnichannel experience for shoppers and improving network communications in its stores.

Shareholder value will be enhanced through the continuation of the company's share buyback program. The company intends to keep buying back its shares under its existing $2.5 billion repurchase program, which was estimated to finish in 2015. While Bed Bath & Beyond only returns cash to shareholders via share repurchases, both Target and Macy's make use of both dividend payments and share repurchases. Target and Macy's offer investors a decent dividend yield at 1.80% and 2.70%, respectively. Looking forward, Target expected to grow its annual dividend by 20% and buy back as much as $4 billion worth of shares in 2014 and beyond.  Year-to-date, Macy's has retired around 27.6 million shares to return $1.25 billion to shareholders. 

My Foolish take
Despite the sluggish outlook, Bed Bath & Beyond's debt-free balance sheet, a significant footprint of more than 1,000 stores, continuous improvement in operating performance, and ongoing share repurchases make me think that the company will continue to drive shareholders' value in the long run. As a result, the recent short-term drop could represent a good opportunity for investors to own a piece of this retailer for the long-term.

Following the smart money
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information