Fool on Call: Bed Bath & Beyond U.S. Borders

A combination of softening new home sales and steep fuel prices didn't exactly help Bed Bath & Beyond's (Nasdaq: BBBY  ) cause in the first quarter. But as my colleague Ryan Fuhrmann said, the home-furnishings retailer still managed to crank out a same-store sales increase of 1.6% and drive its top line by 11.3%. This double-digit increase in net revenue, driven primarily from stores open less than a year, points to one of the more compelling arguments for Bed Bath & Beyond as a potential investment: growth opportunity. In this edition of Fool on Call, we'll explore these opportunities, both domestically and internationally, in greater detail.

Significant growth remains just in the U.S.
During the first quarter, Bed Bath opened six new stores in the U.S., bringing its total stores in operation to 821. Obviously, this isn't the investment opportunity of old, when it only had 40 or so stores up and running, but if management's remarks in the company's latest quarterly earnings conference call are any indicator, there's still ample growth ahead.

During the call, Co-Chairman Warren Eisenberg indicated that management is shooting for a "target in excess of thirteen hundred domestic Bed Bath & Beyond stores." Even if it just manages to hit the low-end of its target range, this still represents a nearly 60% growth opportunity in the U.S alone.

The company plans to open another 64 units through the remainder of this year, increasing its store count nearly 8%. Couple this figure with sales from older sites open more than a year, and you're looking at the potential for low-double-digit net sales for the year. That's pretty good, considering the challenging environment.

Potential investors should take note that much of the new store expansion this year will take place in its second half. Senior Vice President Ron Curwin stated that the company would open 10 stores in the second quarter, bringing its year-to-date new-store-openings total to just 16. "We expect the balance of the new store openings to be divided equally between the third and fourth fiscal quarters," added Curwin.

This also means that much of the company's growth this year will arrive in the back half of the year as well, particularly when you factor in the impact of the holiday shopping season. Investors looking to take a nibble on this stock may want to do so before sales begin ramping up in the third quarter.

O! Canada!
Bed Bath executives pointed out more than once during the call that Bed Bath is in excellent financial health, giving the company, among other things, confidence to continue its expansion spending despite the difficult macroeconomic trends it faces. CEO Steve Temares stated, "We are still budgeting capital spending for all of fiscal 2007 to be approximately $375 million." He then adds, "We'd like to emphasize, that in a challenging economic environment, while others in our industry might be unable to invest in their infrastructure and are, in fact, curtailing operations or limiting growth, we have the resources and are committed to investing in our company." I don't know if that's a jab to at least one of its struggling competitors like Pier 1 (NYSE: PIR  ) , but it sounds good to me.

The company's strong free cash flow situation, which my colleague Ryan Fuhrmann also noted, gives Bed Bath the opportunity to explore its international potential. The retailer will dip its big toe in first in Richmond, Ontario, part of the Greater Toronto area. Bed Bath has already signed a lease for this store. I later picked up in the call that this first Canadian store was included in its year-end new-store target totals, suggesting that it will be open some time during the remainder of this fiscal year.

No other detail was provided in the call regarding its international expansion efforts, but that does little to negate the long-term potential of this move. All retailers and those in the service industry must eventually expand overseas if they hope to continue driving meaningful growth. Papa John's, for instance, is finding its greatest growth right now in China. A critic may point out that selling pizzas in China isn't like trying to sell home furnishings to a completely different culture. One might counter, is it really all that different culturally? In a Fool on Call for Movado, for example, we learned that the burgeoning middle class in China is making for a compelling growth opportunity for the luxury watch producer. Even Harley-Davidson is trying to cash in on the new money in China.

We can debate whether selling home furnishings is like selling pizzas or Harley hogs, but there's little debate about where the long-term growth will come from for Bed Bath: international, particularly among rapidly expanding economic powerhouses like China. And the company's first steps into Canada provide it a learning opportunity on how it might best infiltrate these new important markets.

The challenge and the opportunity
A difficult macroeconomic environment is clearly one of Bed Bath's challenges. To make matters worse, it's trying to drive double-digit sales growth while facing stiff challengers like Macy's (NYSE: M  ) and its strong home furnishings department, pure plays like Williams-Sonoma (NYSE: WSM  ) , Restoration Hardware (Nasdaq: RSTO  ) , Crate & Barrel, and even mass discounters like Target (NYSE: TGT  ) . That's quite a formidable hurdle that Bed Bath must overcome.

The good news for shareholders is that Bed Bath is fully equipped to capitalize on this challenge. Between its healthy financial position and the growth opportunities ahead (and we haven't even mentioned its latest acquisition, buybuy Baby, or its other two concepts Harmon and Christmas Tree Shop), this home furnishings retailer makes a compelling case for itself as a potential long-term investment.

More Foolishness for Bed Bath & Beyond:

Bed Bath & Beyond is both a Stock Advisor and an Inside Value recommendation. Both newsletters are available for a free 30-day trial.

Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 530663, ~/Articles/ArticleHandler.aspx, 4/18/2014 8:24:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement