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This Retailer Shouldn’t Trade at Such Depressed Valuations

Source: Bed Bath & Beyond

Bed Bath & Beyond (NASDAQ: BBBY  ) , a home furnishings retailer, is currently trading at a 52-week low of approximately $60. Its share price has fallen by 12% in the past 52 weeks, while the S&P rose 25% over the same period. The share price drop resulted from Bed Bath & Beyond's disappointing financial results for the fourth quarter of fiscal 2014. Its quarterly revenue and diluted earnings per share declined by 5.8% and 4.8%, respectively.

But Bed Bath & Beyond isn't just any retailer; its stellar financial track record puts those of many of its competitors to shame. Bed Bath & Beyond has delivered positive earnings and free cash flow in every year for the past decade. Trading at a forward P/E of 11 and a trailing-twelve-month EV/EBITDA of 6, Bed Bath & Beyond's valuations look attractive. Bad weather partially led to Bed Bath & Beyond's lackluster results, but investors shouldn't overlook its investment merits.

Other companies such as Signet (NYSE: SIG  ) and Home Depot (NYSE: HD  )  offer further insights into the competitive advantages of Bed Bath & Beyond.

Revenue resilience
The product category 'home furnishings' gives investors the impression that Bed Bath & Beyond is a cyclical business with fortunes tied closely to the ups and downs of the real estate market. This isn't entirely true.

Bed Bath & Beyond offers a wide range of domestic merchandise and home furnishings such as bed linens, bath items, kitchen textiles, kitchen & tabletop items, basic housewares, and general home furnishings. These items include non-discretionary purchases. For example, a Mintel report indicated that replacement is the main driver of bed linen purchases, which accounted for 12% of Bed Bath & Beyond's fiscal 2013 sales.

Another product category that provides a consistent revenue stream for Bed Bath & Beyond is wedding gift registries. A 2011 Bridal Registry Study of more than 12,000 couples by The Knot (of the XO Group) placed Bed, Bath & Beyond among the top three retailers where engaged couples register. The same study indicated that 1.5 million U.S. couples registered in 2011, with the average gift registry valued at $5,158. Bed Bath & Beyond boasts a wide product assortment of kitchen appliances and bakeware, which are among the most popular gift registry items. 

Signet, the largest specialty jewelry retailer in the US, the UK, and Canada, is another retailer which has benefited from the resilience of wedding-related purchases. It is estimated that the bridal category, comprising engagement, wedding and anniversary purchases, makes up half and one-third of its U.S. and U.K. sales, respectively.

In addition, Signet also benefits from occasion-driven purchases such as gift-giving on Valentine's Day and Mother's Day. This has enabled Signet to expand its top line by a respectable 10-year compound annual growth rate of 3.6%.

Coming back to Bed Bath & Beyond, it has managed to increase its revenue in every single year for the past decade, including the global financial crisis from 2008 to 2009. This is the strongest indication that its revenue is far more resilient than perceived.

Online threat
One of the other major concerns with brick & mortar retailers like Bed Bath & Beyond is the threat of online competition. However, e-commerce players do not affect the sales of every product to the same degree.

The domestic merchandise and home furnishing products that Bed Bath & Beyond sells possess two characteristics that make them less susceptible to online competition. Firstly, customers prefer to see and touch these goods before they purchase them.

Secondly, consumers generally require or appreciate advice on home furnishings, but not more mundane items such as toiletries. On one of its websites, Bed Bath & Beyond states that its expert staff will provide customers with ideas to 'turn your house into a home where you can relax and enjoy the moment, in stylish comfort.'

Similarly, Home Depot, the largest home improvement specialty retailer globally, has employees with the requisite knowledge to provide homeowners with relevant tips on home improvement. In addition, Home Depot has a further edge over e-tailers in that most home improvement products aren't suitable for home delivery. The low value-to-weight ratio of products like lawnmowers renders their shipping impractical from a cost perspective.

Home Depot's recent financial results validate the fact that it has been relatively unaffected by online competition. In fiscal 2013, it delivered its highest annual comparable-store sales growth rate (6.8%) in the past 14 years.

Source: Bed Bath & Beyond

Growth drivers
Notwithstanding its size (its top line exceeds $11 billion), Bed Bath & Beyond still has room to grow.

Firstly, it thinks it can grow its current Bed Bath & Beyond store footprint from 1,000 to beyond 1,300. Bed Bath & Beyond has also expanded beyond the US, as it opened its first stores in Canada and Mexico in 2007 and 2008, respectively.

Secondly, Bed Bath & Beyond has other promising retail concepts; it acquired health and beauty care retailer Harmon in 2002, and infant and toddler merchandise retailer buybuy BABY in 2007.

Foolish final thoughts
Investors shouldn't dismiss Bed Bath & Beyond because of a poor quarter. Bed Bath & Beyond is better positioned than its other brick & mortar peers to compete in this new retail environment, given its revenue resilience, the lower degree of online competition it faces, and its growth opportunities.

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