Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



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

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.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2798374, ~/Articles/ArticleHandler.aspx, 9/3/2015 11:40:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Global long-term value investor. CFA level 3 candidate. His US portfolio is up 43.60% in 2013, beating S&P 500's total return of 32.4%.

Today's Market

updated Moments ago Sponsored by:
DOW 16,505.95 154.57 0.95%
S&P 500 1,968.06 19.20 0.99%
NASD 4,784.75 34.77 0.73%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 11:25 AM
BBBY $62.79 Up +0.79 +1.27%
Bed Bath & Beyond CAPS Rating: ***
M $59.88 Up +1.26 +2.15%
Macy's, Inc. CAPS Rating: **
TGT $78.14 Up +1.09 +1.41%
Target CAPS Rating: ****