Fool Covers BBBY Short
March 16, 1995

We're cashing out our short in. . . .

TYPE: Darling/Highflyer
Phone: (201) 379-1520
Closing prices, August 4th, 1994: Bid $29 1/2, Ask $29 3/4

Trailing 12-month revenues: $400 million
Trailing 12-month EPS: 80 cents
Last quarter reported: Nov 1994 (FY: Feb)
Next quarter reported date: March 29, 1995
Consensus EPS estimates for quarter: $0.25e vs. $0.20

FOOL ratio: 1.00

----->>>Trade: Buying back 170 shares, March 16th

It's time for the first-ever cashout in Fool history. That's right, ladies, gents, and Fools, we're taking our profit in Bed Bath & Beyond.

Bed Bath & Beyond, the Springfield, NJ-based chain of home-furnishing superstores, has not been a very good stock since we sold its shares short last August 5th. It has now dropped from our entry price, $28.53 (that includes deduction for commission), to Tuesday's closing price of $22 3/4, a drop of 20.3%. Long-time Fools know that when we go into a short position, we look to cash out of it at a 20% gain. Tomorrow, we'll hope to do just that. Tomorrow, we will be covering our short by buying back these shares.

NUMBERS CONTINUE GOOD. The numbers have been good all the way through, with the company continuing to throw up gaudy-looking sales increases. Although we haven't yet seen earnings (reported at the end of this month), BBBY did preview its sales. Net sales for fiscal 1995 (ended February 26, 1995) were $440.3 million compared with $305.8 million for fiscal 1993, an increase of approximately 44.0%. Most of that was due to new store openings, of course. Comparable store sales for the fiscal year increased by approximately 12.0%. Net sales for the fourth quarter were approximately $127.8 million compared with $87.8 million for the fourth quarter last year, an increase of approximately 46%. But comparable store sales for the quarter increased by only 7.5%.

The discerning reader will notice that the fourth quarter same-store numbers are not quite growing as fast as those for the year (7.5% vs. 12.0%). Additionally, February same-store sales numbers were up just 4.2%. . . further slowing. All of which tells you something about why we made money on this transaction. In the midst of slowing growth, a Fool will typically expect a lower price-to-earnings multiple.

LET'S TALK FOOL RATIO. When we first shorted this stock at $28 3/4, the company had trailing earnings of 67 cents per share. That's a P/E ratio of 43. Since, the company has HIGHER earnings per share and a LOWER P/E. Earnings per share are now 80 cents, making the P/E just 28. So. . . 43 down to 28. . . exactly what we mean when we say that slowing growth makes for a lower P/E ratio, and profits for short sellers. Our entire Foolish valuation approach is founded on this notion, so it's always very pleasing to see it play out so, er, Foolishly.

Going forward from here, we see Zacks reporting earnings estimates of $1.09 per share for fiscal 1996 (ended 2/96), an increase of about 28% over 1995. Thus, the P/E ratio of 28 no longer makes the stock look so overvalued, with a Fool Ratio of 1.00. This is the primary reason we're outta here.

Now, a Fool of 1.00 is certainly nothing to get excited about on the buy side. The very best thing that can be said about this stock is that it's fully valued. However, we have made our 20% short, which is pretty much all we wanted to make off with.

FOOLISH RETROSPECTIVE. We've held this one longer than most Fool shorts. Ideally, we like to make our 20% in about two months. In this case, it took us almost 8 months. Then again, the broad Market has been VERY strong all the way through, now up about 10% over that time, so a 20% drop is something to celebrate.

Interestingly, this stock happened to trade in a tight range between $25 and $30 for more than a year before falling apart in the past week. A number of Fools "played" this trading range, shorting it each time it hit $30 and cashing out each time it hit $25. They made LOTS and LOTS of money. We, on the other hand, like the Fools we are, sat waiting for it to drop below $23. But our approach simply doesn't play ranges, so we're going to miss opportunities like this one almost every time. It's all about how you play the Market. We recommend being consistent, whatever you do.

(A good example of where playing a trading range hurts you is with America Online, for example. Many people tried to play it up and down from $60 to $90---pre-split---until it left them all in the dust to hit its current price of $168---in pre-split terms, of course.)

NO CONFIDENCE. A fellow Fool who has watched our BBBY play since back when we were a print publication provided us some on-target advice a few days ago. He said that if we ever do decide to cash out, it'll no doubt then drop immediately to $15. If we don't cash out, he said, it'll go back to $30. That's very indicative of our own mentality on Bed Bath & Beyond. . . we kind of feel like we're going to play it wrong no matter what we do. And you might feel that way too if you'd watched this thing go 30-to-25-to-30-to-25-to-30-to-25-and-on-and-on monotonously for months. . . each time ALMOST---but not QUITE---hitting your target price.

Fortunately, despite our low self-regard for our Bed Bath efforts, we're going to walk away from this table with a good profit. Maybe that's the way good investing feels, in the end. . . like it could have been even better!

PLAY IT AS YOU WILL. Because this stock has a capitalization of about $768 million, we're not expecting our buyback to tilt the Market at all tomorrow. Consequently, we're not going in with a limit order. We still haven't decided on a daybreak market order, or not. The reason NOT to put in an early market order is that this stock has been EXCEPTIONALLY weak intra-day each day this week, so far. With disappointing U.S. retail numbers, the whole sector has been soft (except for our Sears holding, but that's another matter!) Anyway, we may try to catch it a bit lower tomorrow, or maybe just cash out at the beginning. We'll just commit to getting out by the end of the day, and report back to you whenever we do wave the Foolish golden hankie for the last time.

A WORD OR TWO BEFORE YOU GO. When we did our initial SHORT recommendation, we mentioned the company's motto: "Beyond any store of its kind." As we pointed out then, we'll point out again. . . this motto is extremely accurate if we're talking about the stock's valuation!

Maybe we should stick to shorting really bad, unintentionally ironic company mottoes for now on. Maybe that's the way to avoid the occasional Paychex!