Fool Shorts BBBY
August 04, 1994

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

Trailing 12-month revenues: $333 million
Trailing 12-month EPS: 67 cents
Last quarter reported: May 1994 (FY: Feb)
Next quarter reported date: September 23, 1994
Consensus EPS estimates for quarter: $0.23e vs. $0.18

FOOL ratio: 1.47

Trade: Shorting 170 shares, August 5th

Bed Bath & Beyond, based in Springfield, New Jersey, is, like most Foolish companies, a very successful operation. The company operates a nationwide chain of superstores dealing in a great variety of home furnishings. Each store contains over 25,000 products in dozens of different colors, arranged conveniently in 11 easy-to-find sections. Ideally, the company makes it possible for you to find within its walls ANY item you'll ever need to furnish your home, at (tired phrase) "everyday low prices." We don't have much disagreement with any of the above. It's a fine operation.

RAPID SALES GROWTH. Take a look at sales, which have grown at an annually compounded rate of 26% over the past five years. Even after that great half-decade performance, same-store sales are still continuing to grow at rates way above most retailers. BBBY's first quarter of 1994 continued this trend: revenues were up 48.8% to $85.8 million, and net income rose 37% to $4.6 million. Analysts had projected EPS of $0.13 per share, versus $0.10 for last year's comparable quarter; Bed Bath matched them.

BUT WHAT ABOUT THE STOCK? When the current valuation of the stock is mentioned, that's when Fools hop off this party train. The company's shares have appreciated four times in the two years since it's been public. Monster growth companies may merit a four-spot. Not these guys. Why? Because BBBY now trades around 45 times its trailing 12-month earnings of $0.67, but with far too low a rate of growth.

The estimated annualized EPS growth rate is 30%, running a bit ahead of the company's 5-year sales growth rate of 26%. The rule of thumb here---familiar to long-time Fools and those who've cruised our Novice Area---is that most stocks are fully valued when their P/E ratio equals the percentage of their growth rates. A P/E ratio of 30 gives you a fully valued share price of $20 1/8. With the stock at $29 1/2, we find ourselves agreeing with the company's motto: "Beyond any store of its kind." But we're talking, of course, about valuation.

EPS GROWTH. Some investors who like the stock point to Bed Bath & Beyond's outstanding sales and earnings growth over the past year. Heck, they're right. But we at Fool HQ think that these people, and the Market, are failing to recognize that earnings per share growth is NOT keeping up with sales growth. This recent quarter showed only 30% EPS growth off of 48% sales growth and projections for the next 21 months call for an even slower rate of growth than that. The Street needs to recognize that while sales have grown rapidly, so have costs. . . MORE rapidly. Margins are declining, and shares outstanding are increasing. Now wonder Smith Barney downgraded this stock a couple days ago to HOLD. Might this prefigure lowered earnings estimates in coming months? This stock is already overpriced on existing earnings. If estimates decline, look out below.

SHORTING STOCK. True Foolishness involves the attempt to make money on stocks both ways, down and up. Most investors only invest long, and some are indeed not permitted to do otherwise by their broker (or blood relations!). This makes shorting even more attractive to us, contrarians that we are. And of course it's awfully nice to have a little on the Don't Pass Line if and when the Market craps out.