Bed, Bath, and Beyond: Graham-like Value Still Exists

To the average person Bed, Bath and Beyond (NASDAQ: BBBY  )  is just another one of those retailers selling every-day products. It does not offer the appeal of revolutionizing the world--in fact, it is a boring, mundane business anyone can understand. This is exactly the type of business value investors prefer to go after.  

Competition
Due to Bed, Bath, and Beyond's niche product offerings, the company has fragmented competition. For instance, with its online presence, it appears that Amazon (NASDAQ: AMZN  ) would be Bed, Bath and Beyond's main rival. With its brick and mortar presence, Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) are two competitors to keep an eye on as well.

Earnings
The trend in earnings, not just the numbers, shows a clearer picture of overall profitability. . For the past four years, the overall trend of Bed, Bath, and Beyond's earnings per share increased compared to its competitors. This is a positive indication for the future growth of the company and indicates that value is being added for shareholders.

In addition to the growth in earnings, another valuable metric is price to earnings. Rather than use the traditional price to earnings method to perform relative valuation analysis, I will use enterprise value to Earnings Before Interest and Taxes. This ratio evaluates the entire company, not just a portion of it; thus, enterprise value (EV)/Operating Earnings (EBIT) is essentially the P/E ratio of the entire company, not just the equity portion. Enterprise value is calculated as market cap plus long term debt minus cash. 

The following chart shows the EV/EBIT for the past four years:

Given the fact that earnings have been rising and the EV/EBIT is much lower than its competitors, Bed, Bath and Beyond currently appears to be attractively priced.

Profit Margins
Lastly, the profit margin ratios seem stable. To me this indicates no surprises in the company and it is steadily able to maintain its margins. Although increased profit margins are what a lot of investors look for, I prefer the lack of volatility. 

Concerns
There are a few factors that concern me about Bed, Bath and Beyond. One aspect I see working against Bed, Bath, and Beyond is that its niche is being attacked by its fragmented competition. For instance, according to Wal-Mart's most recent annual report over the past 3 years home furnishings have contributed to 7% of Wal-Mart's total sales. Although that may not sound like a lot, the following should put it into perspective (note: the numbers are in millions of dollars):

Even though it is such a small segment for Bed, Bath and Beyond, Wal-Mart's home furnishing segment eclipses that of Bed, Bath, and Beyond. That is something I think investors should be wary of.

On the other hand, Amazon is the dominant player in e-commerce with home furnishings being one of many categories Amazon offers its customers.. Should this category of consumer goods take a hit, Bed, Bath, and Beyond may have a major setback and will need to restrategize. A major part of Bed, Bath, and Beyond's growth comes from store openings. This strategy concerns me, as I believe the shift seems to be from brick and mortar to online purchases. Staples (NASDAQ: SPLS  ) is a company acknowledging this trend and is pursuing a reverse strategy compared to Bed, Bath, and Beyond .

Outlook
Currently, Bed, Bath, and Beyond appears to be a value play given that its market is much smaller compared to its competitors. The company has the potential to grow and expand.

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