4 Reasons to Buy Bed Bath & Beyond

Bed Bath & Beyond could fit well in a long-term investors' portfolios; its valuation is less than half of its peer, William-Sonoma.

Jul 7, 2014 at 12:18PM

Bed Bath & Beyond (NASDAQ:BBBY) has dropped below its 52-week low after reporting sluggish first-quarter 2014 results. Since the beginning of the year, its stock price has declined by 27.6%, from around $80 to $58 per share. In contrast, its peer William-Sonoma (NYSE:WSM) has experienced a gain of 24.25% in the same period. Let's take a closer look to determine whether or not investors should buy Bed Bath & Beyond at its current price.

Disappointing quarterly results
In the first quarter, Bed Bath & Beyond delivered EPS of $0.93 on revenue of $2.66 billion, lower than analysts' EPS estimate of $0.94 and revenue estimate of $2.69 billion. In the second quarter, the company expected to earn $1.08 to $1.16 per share, missing analysts' forecast of $1.19 per share. Bed Bath & Beyond's first-quarter comp sales inched up only 0.4% compared to a rise of 3.4% last year. Management claimed it experienced the mixture of slight increase in average transaction amount and the decrease in the number of transactions. The gross margin declined from 39.5% last year to 38.8% this year, mainly because of an increase in coupon expenses, customer shipping expenses, and a shift to lower-margin categories sold to customers. 

Four reasons to be bullish on Bed Bath & Beyond
Investors might be disappointed by the company's recent earnings announcement. However, for four main reasons, I personally think Bed Bath & Beyond will deliver decent results to investors in the long run.

First, Bed Bath & Beyond is a consistently growing retailer. In the past 10 years it has managed to more than double its revenue from $5.15 billion to $11.5 billion. Its pre-tax income and free cash flow also experienced a similar rate of growth during the same time. In 2014, while it earned $1.6 billion pre-tax, the free cash flow came in at around $1 billion. Thus, despite its recent headwinds, I would expect management to continue growing the top and bottom lines in the next several years.

Second, Bed Bath & Beyond keeps buying back its shares in the market. Since 2005, its share count has dropped from 306 million to only around 202 million. In the recent quarter, it also spent more than $270 million to repurchase 4.2 million shares. Looking forward, Bed Bath & Beyond will continue buying back shares to complete a $2.5 billion share repurchase plan during fiscal 2015. 

William-Sonoma has also returned cash to shareholders, not only via share buybacks but also dividend payments. Over the past year, around $374 million has been returned to shareholders via share repurchases and $86 million via dividends. 

Third, any long-term investors would be amazed by the high double-digit return on invested capital Bed Bath & Beyond has demonstrated. In the past 10 years, its return on invested capital fluctuated in the range of 15.3% to more than 25.9%. Trailing 12 months, its return on capital has stayed at 25.5%. In order to achieve those high returns, the company has employed no debt.

Last but not least, at the current price, Bed Bath & Beyond is cheap. The EV/EBIT ratio (Enterprise Value / Earnings Before Interest and Taxes) is only 6.75, much lower than William-Sonoma's EV/EBIT of 14.4.

The Foolish bottom line
Generating double-digit return in the past 10 years, consistently growing free cash flow, employing no leverage with ongoing share buybacks, and being priced so cheap in the market, Bed Bath & Beyond could deliver a sweet return to its shareholders in the long run. With those operational characteristics, Bed Bath & Beyond could be a potential buyout candidate.

Leaked: This coming consumer device can change everything
Imagine the multi-billion dollar sales potential behind a product that can revolutionize the way the world shops and interacts with its favorite brands every day. Now picture one small, under-the radar company at the epicenter of this revolution that makes this all possible. And its stock price has nearly an unlimited runway ahead for early, in-the-know investors. To be one of them and hop aboard this stock before it takes off, just click here.  

Anh HOANG owns shares of Bed Bath & Beyond. The Motley Fool recommends Bed Bath & Beyond and Williams-Sonoma. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers