Is It Time to Buy Bed Bath & Beyond Stock?

Bed Bath & Beyond's stock is on the rocks, but does its cheap price tag mean that it's a steal or a trap?

Aug 15, 2014 at 3:39PM

Over the last 12 months, Bed Bath & Beyond's (NASDAQ:BBBY) stock has fallen 16%. The bulk of that drop came early in 2014, when the company announced third-quarter results and dropped its full fiscal-year earnings forecast. From that point, Bed Bath & Beyond's stock price has continued to slip from $70 to $61. The stock is now trading at a paltry -- for today's market -- 13 times trailing earnings.

With an earnings valuation that low, investors might be tempted to pick up some shares in hope that the brand will level out with the industry average, which is closer to 17. Before you jump in with both feet, though, here are some important things to consider.

Bed Bath & Beyond's competition

Bed Bath & Beyond competes with companies such as Williams-Sonoma (NYSE:WSM) and Pier 1 Imports (NYSE:PIR). Both of those businesses have a higher P/E ratio than Bed Bath & Beyond, though Williams-Sonoma's is on the rise, while Pier 1's is falling.

BBBY PE Ratio (TTM) Chart

BBBY P/E Ratio (TTM) data by YCharts.

Bed Bath & Beyond and Pier 1 are each having trouble getting customers through the door, and they've watched gross margins compress as they run more promotions to keep sales up. Bed Bath & Beyond's gross margin fell from 39.5% in the first quarter of 2013 to 38.8% in 2014. Even discounting didn't really do the trick, as comparable sales were held to a mere 1.7% increase over the previous year.

Compare that to Williams-Sonoma's results in its first quarter: Year-over-year comparable sales were up 10% and gross margin rose from 37.6% in 2013 to 37.8% this year.

Problems rear their heads for Bed Bath & Beyond

Bed Bath & Beyond's low valuation isn't just a factor of its promotions and weak sales growth. The company is also taking a hit on the bottom line. Diluted earnings per share crept up 5% in fiscal 2013, but results were flat in the first quarter of fiscal 2014. Bed Bath & Beyond is still modeling a mid-single-digit earnings-per-share increase for the full fiscal 2014, but analysts expect just a 3% increase for the entire year.

In fact, most analysts expect mediocrity from Bed Bath & Beyond, with growth estimates trailing the S&P 500 average over the next year. Meanwhile, Pier 1 is expected to underperform next quarter, but to grow more steadily for the rest of the year.

The levers Bed Bath & Beyond can't control

While all three of these businesses can promote and sell to generate traffic, none have control over two of the biggest factors affecting them right now: wages and home prices. Americans are still working in a wage-stagnant environment, giving them less cash to spend on shopping. That's going to exacerbate Bed Bath & Beyond's sales problem, as customers will be less likely to spread their excess cash around to secondary brands.

On the other hand, as more homeowners emerge from the mortgage crisis with homes that are no longer underwater, they'll be putting their houses on the market. The existing home market is already showing signs of recovery, which fuels purchases from home improvement stores and home decor brands such as Bed Bath & Beyond.

The takeaway

Wages are a problem, but home sales are going to give these companies a boost over the next year. I don't think that's going to be enough for Bed Bath & Beyond to outperform its peers, though. The company is working through very sluggish sales, and even with a low valuation there just isn't enough upside to make this stock palatable at this time.

Bed Bath & Beyond's next earnings call is scheduled for the end of September. If the company can boost comparable sales toward a 5% increase, can hit its earnings target, and can show some recovery in gross margin, then things might be better for investors. For now, I'm holding off.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Andrew Marder owns shares of Williams-Sonoma. 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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers