Is There Any Value Left in the Home Goods Industry?

The home goods retailers have been holding up fairly well on the back of a rebounding economy.

Jul 18, 2014 at 9:00AM

Shares of Bed Bath & Beyond (NASDAQ:BBBY) are down to levels not seen since early 2013. The stock tumbled nearly 10% in one day earlier this month, hitting a new 52-week low, after posting disappointing fiscal first-quarter earnings results. Comparable-store sales for the fiscal first quarter came in at 0.4%, compared to 3.4% for the same period last year.

This also follows up a weak fiscal fourth quarter. The company's fourth-quarter earnings were down 5% year over year, and same-store sales growth of 1.7% was below company expectations of between 2% and 4%. However, Bed Bath & Beyond still offers consumers a unique shopping opportunity, and it could be a deep value investment opportunity.

What to expect going forward
Bed Bath & Beyond doesn't just operate Bed Bath & Beyond stores, but also World Market, Cost Plus, Christmas Tree Shops, and buybuy BABY stores. The beauty of Bed Bath & Beyond is that it aligns its merchandise with the geographical region.

While Bed Bath & Beyond doesn't have much of an e-commerce presence, it is focusing on expanding its retail footprint. The company plans on opening 30 stores this year in Mexico. Then, over the long term, it hopes to boost its U.S. and Canada store count to 1,300, up from its current store base of under 1,100.

The company also expects to make a bigger push toward tech going forward. This includes upgrading its app and its mobile site. Other major areas of upgrade include boosting the communication between its stores and implementing a new point of sale. Both options should help improve inventory.

Still plenty of value in home goods retail
Pier 1 (NYSE:PIR)is one of the best turnaround stories in the home goods space. After trading at $0.11 back in 2008, the company has clawed its way back and is consistently growing revenues. Sales have been up every year for the last five years, with a cumulative growth rate of 37%. It is worth noting that Bed Bath & Beyond has grown revenues by 47% over that same time period. 

Shares of Pier 1 nearly hit $35 in late 2013, but they've since retreated and are down 35% from their all-time high. It has orchestrated a solid turnaround despite the economic backdrop. Going forward, Pier 1 plans on continuing its new policy of net store openings. After having closed stores for a number of years, it opened six in fiscal 2012, opened 10 last year, and plans to open another 10 this year.

Williams Sonoma (NYSE:WSM) remains one of the best-positioned companies given its omni-channel approach. The biggest part of this is the company's presence in e-commerce. In fiscal 2014, just under 50% of its revenues were derived from the direct-to-consumer segment, while the rest came from retail. Williams Sonoma also owns the Pottery Barn brand, which is an assortment of home furnishings and furniture.

How shares stack up
Bed Bath & Beyond trades at a P/E ratio of 12.3, which also happens to be the lowest in five years. This P/E ratio is also below Pier 1's P/E ratio of 15.9 and Williams Sonoma's 25. At 26%, Bed Bath & Beyond boasts the highest return on investment of the three. It also has the highest profit margin, and Bed Bath & Beyond has no debt.

A notable bright spot is the company's new buyback plan, which is good enough for $2 billion. This is in addition to its close to $900 million buyback plan outstanding. That's good enough to reduce its shares outstanding by over 20%. The new buyback plan is expected to be completed by fiscal 2016. Bed Bath & Beyond doesn't offer a dividend yield, but PIer 1 and Williams Sonoma do, coming in at 1.5% and 1.8%, respectively.

Bottom line
Bed Bath & Beyond does appear to be in deep value territory. At the very least, it's much cheaper than major peers and has better margins. The company is increasing its spending on technology in an effort to better manage inventory in its stores. It also has a robust buyback plan that should help further grow earnings. For investors looking for a presence in the home improvement market, Bed Bath & Beyond is worth a closer look. 

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Marshall Hargrave has no position in any stocks mentioned. 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.

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