4 Reasons to Buy Bed Bath & Beyond

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.

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