Bed Bath & Beyond: Bright & Shiny (Breakfast News) December 16, 1999


Thursday, December 16, 1999

"Decisiveness is often the art of timely cruelty."
-- Henry Becque

Bed Bath & Beyond: Bright & Shiny

By Richard McCaffery (TMF Gibson)

Want to see a stock that jumped around all year to no avail? Then look at domestic furnishings retailer Bed Bath & Beyond (Nasdaq: BBBY).

It started the year around $33, went as high as $39, as low as $25, and closed last night at $32 1/16. So despite strong sales, consistent earnings growth, and tight management over the course of 1999, it's down almost a point. Compare that to the S&P 500, which is up 14.2%. What gives? Well, more on that in a second.

Bed Bath & Beyond reported last night that net earnings increased 29% for its fiscal third quarter to $31.7 million, compared to $24.7 million a year ago. Net earnings per share increased to $0.22, up from $0.17 a year ago, and net sales jumped 34% to $487 million, up from $363 million a year ago.

The results were in line with analyst estimates.

Comparable-store sales, which retail investors know are critical because it measures foot traffic at stores around a while and omits new openings, jumped 7.8%. That's very nice growth considering comparable growth of 8.8% a year ago.

The company, which operates 237 stores in 38 states, has opened 51 new stores this year and expanded four. It also is making plans to open about 60 superstores next year, and recently launched the first phase of its website. (OK, it's a little behind there.)

Its balance sheet looks strong, and the company (which deserves a cheer for publishing its cash flow statement at the same time as its income statement and balance sheet) generated $76.1 million in cash from operations through the first three quarters, compared with $49.1 million a year ago.

Despite heavy investment in capital expenditures -- $74.3 million -- it had a dollop of free cash flow remaining, about $1.8 million. That's superb with all its expansion.

Considering these results its stock had a pretty depressing year, but fortunately for investors it looks like market problems rather than Bed Bath & Beyond problems.

One explanation for lackluster performance is interest rates, which the Fed increased and Wall Street spends lots of time worrying about. Interest rates affect stores like Bed Bath & Beyond because higher rates mean fewer people buying homes and thus fewer people buying towels, bath mats, and other comfy bathroom furnishings. Overall, retail stocks had a tough year.

The other thing to keep in mind is that it trades at an earnings multiple around 40, which is ahead of its long-term growth rate and ahead of most of its retail peers. P/Es reveal nothing in terms of a company's intrinsic value, but the stock is at least perceived as expensive relative to its earnings power. Even though Bed Bath & Beyond's performance lagged the market, shareholders should be pleased with its direction.

News to Go

As expected, retail superstore king Wal-Mart (NYSE: WMT) and leading Internet service provider America Online (NYSE: AOL) formed a partnership to create a co-branded ISP that will tap into Wal-Mart's enormous customer base and help provide local Internet access to consumers that don't have a local ISP.

Auto maker Ford (NYSE: F) and database software manufacturer Oracle (Nasdaq: ORCL) hope to take AutoXchange, their joint venture that will help manufacturers track supply costs, public within the next 18 months, Bloomberg reported.

The Federal Communications Commission is asking number two long distance telephone company MCI WorldCom (Nasdaq: WCOM) and number three company Sprint (NYSE: FON) to submit information about their Internet operations in the wake of the proposed $129 billion merger.

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