Let's get one thing clear -- fellow Fool David Meier and I agree on the quality of Bed Bath & Beyond's (Nasdaq: BBBY ) business. As David correctly points out, the return on invested capital (ROIC) is above 15%, which by his estimation is 5% above the company's cost of capital. For that matter, I think the company generates an even greater 6% spread above its cost of capital.
We also agree that much of Bed Bath & Beyond's current advantages are a combination of its product mix and scale of operations. These advantages have allowed Bed Bath & Beyond to succeed where Linens 'n Things, Restoration Hardware (Nasdaq: RSTO ) , Pier 1 (NYSE: PIR ) , Cost Plus (Nasdaq: CPWM ) , and Kirkland's (Nasdaq: KIRK ) have all struggled.
However, to consider Bed Bath & Beyond's current advantages as a sustainable competitive advantage is where two Fools must part ways. While Bed Bath & Beyond's scale allows it to leverage its purchasing power, its scale is still based on variable input costs, not fixed costs. The inability to leverage a large fixed cost (like a manufacturing plant), makes for low barriers of entry. There is nothing that precludes the previously listed competitors from competing more effectively with Bed Bath & Beyond in the future.
Even if much of the smaller competition remains weak, increased competition is likely to come from much stronger competitors like Target (NYSE: TGT ) , which has significant scale. This should hold even truer as both Target and Bed Bath & Beyond grow their businesses.
But scale and competitive advantages are only part of our disagreement. While we both believe Bed Bath & Beyond was a more interesting value six months ago, I think today's price is at best a hold. Why the difference? Call me Foolish, but I don't let Bed Bath & Beyond get away with free growth, which happens when you build a valuation model using only maintenance capital expenditures. So while Bed Bath & Beyond's future growth is creating shareholder value, that value is already discounted into today's share price.
Fool Contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned. Bed Bath & Beyond is both a Stock Advisor and an Inside Value recommendation. The Motley Fool has a disclosure policy.