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Is Bed Bath & Beyond, Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Bed Bath & Beyond (NASDAQ: BBBY  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Bed Bath & Beyond's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Bed Bath & Beyond's key statistics:

BBBY Total Return Price Chart

BBBY Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

9.1% vs. 20.7%


Improving EPS



Stock growth (+ 15%) < EPS growth

8.2% vs. 46.6%


Source: YCharts.
*Period begins at end of Q2 (May) 2011.

BBBY Return on Equity (TTM) Chart

BBBY Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity

No debt


Source: YCharts.
*Period begins at end of Q2 (May) 2011.

How we got here and where we're going
Bed Bath & Beyond cleans up rather well, but it seems to have missed a few spots here and there -- the company's recent slide has cost it passing grades on our revenue, profit margin, and free cash flow growth tests. However, the specialty retailer still comes through with four out of seven passing grades overall, which is a respectable score for an established retailer. However, those three failing grades may portend trouble ahead for Bed Bath & Beyond if the slowdown behind them signals an end to growth. Can Bed Bath & Beyond regain its mojo, or is it time for investors to kick the company's shares out of their portfolios? Let's dig a little deeper to find some answers.

This has not been a good year for Bed Bath & Beyond. The company's top line has underwhelmed for two consecutive quarters, and its EPS has fallen even faster, with year-over-year EPS growth rates now negative for both of the past two quarters. This hasn't happened since the financial crisis, but the post-crisis trend is quite clear now, and unless Bed Bath & Beyond can do something to juice its bottom line, it may be doomed to worse quarters ahead:

BBBY Normalized Diluted EPS (Quarterly YoY Growth) Chart

BBBY Normalized Diluted EPS (Quarterly YoY Growth) data by YCharts.

Fool writer Joseph Solitro has pointed out that this drop was blamed on higher levels of coupon use and more claimed promotional offers, and based on my limited personal experience with Bed Bath & Beyond, this certainly makes sense. The company will offer 20% off one item virtually every time one shops on its website, and this can be a big savings in dollar terms when so many items in stock run several hundred dollars or more. This EPS decline comes despite the fact that Bed Bath & Beyond has reduced its share count by a third over the past decade. Another big buyback effort will take roughly 15% of Bed Bath & Beyond's current shares outstanding off the market at current prices. This should help hold the line on EPS growth metrics, but it does nothing to solve the underlying problem of weak (or no) earnings growth.

However, it's worth noting that many of Bed Bath & Beyond's peers have been suffering the same problem lately. Pier 1 Imports (NYSE: PIR  ) has seen EPS decline at a steeper rate than Bed Bath & Beyond's over the past two quarters, and megaretailer Target (NYSE: TGT  ) hasn't reported year-over-year quarterly EPS growth for more than a year now:

BBBY Normalized Diluted EPS (Quarterly YoY Growth) Chart

BBBY Normalized Diluted EPS (Quarterly YoY Growth) data by YCharts.

Among Bed Bath & Beyond's clear competitors, the only ones to sustain ongoing bottom-line growth in a difficult retail environment appear to be Williams-Sonoma (NYSE: WSM  ) and Macy's (NYSE: M  ) , which have not suffered any declining EPS for the past three years. However, neither of these competitors is anywhere near as inexpensive as Bed Bath & Beyond -- in fact, Williams-Sonoma's P/E ratio is now twice that of Bed Bath & Beyond's following this year's divergence in share growth. Other Foolish writers have come to similar conclusions on valuation. Bed Bath & Beyond's enterprise value-to-operating earnings ratio is far lower than that of most competing home-goods retailers. Its price-to-book and price-to-free cash flow ratios are also much lower than either Pier 1's or Williams-Sonoma's.

On the other hand, Wall Street has projected only 7.4% in EPS growth for Bed Bath & Beyond next year, well below its sector's high double-digit growth rate, which includes estimates of 12.2% EPS growth for Macy's, 13.1% for Williams-Sonoma, 16.7% growth for Pier 1, and even 16.3% for Target. It's also worth considering that Bed Bath & Beyond is the only stock of this group to pay no dividends -- if the other shares languish, they'll at least keep paying you back somehow.

Putting the pieces together
Today, Bed Bath & Beyond has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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Alex Planes

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.

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Related Tickers

8/27/2015 4:00 PM
BBBY $62.50 Up +1.29 +2.11%
Bed Bath & Beyond CAPS Rating: ***
M $59.05 Up +0.33 +0.56%
Macy's, Inc. CAPS Rating: **
PIR $9.99 Down -0.11 -1.09%
Pier 1 Imports, In… CAPS Rating: **
TGT $77.85 Up +1.01 +1.31%
Target CAPS Rating: ****
WSM $76.70 Down -6.42 -7.72%
Williams-Sonoma CAPS Rating: ***