Is This Bed Bath & Beyond's $2 Billion Mistake?

Source: Bed Bath & Beyond

On July 7, news broke that Bed Bath & Beyond (NASDAQ: BBBY  ) had adopted a plan to buy back $2 billion of the retailer's shares. In recent years, the company has done really well for itself. But with sales slowing, is now the worst time for management to be rewarding shareholders in this manner? Or, like Macy's (NYSE: M  ) , can the retailer get away with major buybacks and still see stellar performance?

This isn't Bed Bath & Beyond's first rodeo!
According to its press release, Bed Bath & Beyond's board of directors authorized the retailer to buy up to $2 billion worth of the company's stock. While management expects the business to complete these purchases on the open market, it also claimed that shareholders shouldn't be surprised to see accelerated or other (i.e. possibly large deals with major shareholders) transactions. If everything goes according to plan, the company will finish the buyback by the end of its 2013 fiscal year.

However, this isn't the first time Bed Bath & Beyond has decided to hand cash back to its investors. As of May 31, the company still had $861 million remaining under a previous plan. Before tapping into its new plan, management is expected to exhaust this balance, which means that the total amount of shares acquired between May 31 and the end of the retailer's 2016 fiscal year will have a nominal value of $2.86 billion. Once completed, this series of transactions will mark $9.46 billion in share buybacks the company has engaged in since 2004.

Source: Bed Bath & Beyond

While this move may prove positive for shareholders, especially at a time when Bed Bath & Beyond's shares are trading near their 52-week low, it does come with some risks. The biggest comes down to a question of financing. In its press release, management announced that shares will be purchased with cash on hand and cash flow from operating activities, but it also implied debt might play a role. With $712.8 million in cash on its balance sheet at the end of 2013 and $1.4 billion in operating cash flow for that period, share buybacks without debt might be possible, but it would leave the retailer with little spare change to use if needed.

Is now the time to buy shares?
With shares trading 27% below their 52-week high and just 8% above their 52-week low at $59.26, it's not too hard to guess that management believes the company's significantly undervalued by Mr. Market. While this is a possibility, a better way for management to deliver value to the company's shareholders might be to invest in its slowing operations. Between 2009 and 2013, the company saw its revenue jump 47% from $7.8 billion to $11.5 billion, while net income soared 70% from $600 million to $1 billion.

BBBY Revenue (Annual) Chart

BBBY Revenue (Annual) data by YCharts

In its most recent quarter, however, sales ground to a halt, rising less than 2% from $2.61 billion to $2.66 billion at a time when net income declined 8% from $202.5 million to $187.1 million. The main contributor to this slowdown appears to have been Bed Bath & Beyond's nearly stagnant comparable-store sales growth of just 0.4% year over year combined with an increase in its cost of goods sold from 60.5% of sales to 61.2%.

Is Bed Bath & Beyond taking a page out of Macy's book?
Despite tough times for retailers lately, one of the best performers in the industry has been Macy's. Over the past five years, the company's revenue has increased 19% from $23.5 billion to $27.9 billion. According to Macy's most recent annual report, this strong revenue performance has come in spite of a decline in store count and has been attributable to rising comparable-store sales and a growing e-commerce business.

M Revenue (Annual) Chart

M Revenue (Annual) data by YCharts

Because of fewer locations in operation, and due to cost-cutting initiatives, Macy's bottom line has improved as well, rising 352% from $329 million to $1.5 billion. The biggest contributors to this tremendous growth were the retailer's selling, general, and administrative expenses, which fell from 34.3% of sales to 30.2%, and its interest expense, which dropped from 2.4% of sales to 1.4%.

Even though Macy's has demonstrated impressive growth in recent years, the company has managed to buy back significant amounts of stock in the process. Since 2004, management has bought back $11.9 billion worth of shares, nearly twice what Bed Bath & Beyond has done.

Final takeaway
Based on the data provided, it's clear that other retailers like Macy's have been able to buy back large amounts of stock while continuing to grow. But this does not mean that either retailer is behaving in an optimal manner. Yes, it is possible to buy shares back; but with the business seeing revenue slow and profits decline modestly, management might be wiser to take the money and allocate it to revamping operations and investing in growth initiatives before allowing business even a chance of worsening.

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