Bed Bath & Beyond (NASDAQ:BBBY) looks attractive, at first blush. But before you jump into bed with it, you should take a closer look. The domestic and home furnishings merchandiser has an excellent growth record and it's maintained consistently high profit margins. But the stock is priced to perfection and growth has been decelerating from its historical pace. Prospective investors should be wary.
Announced yesterday, earnings through the first nine months of this year grew 29%. That is indeed robust growth, but not as robust as the 41% for the same period a year ago. Same-store sales, a key measure of growth at outlets open for more than one year, gained 5.6%, again a healthy jump, but, compared with last year's 9.5%, the number looks pale.
Overall revenue tells the same story. Topline growth peaked at 44% in 1995, but since then the pace has steadily slowed to half that rate in the last two years. Continuing the slide, nine-month sales grew 21% this year, down by 6% froma year ago. The company's sales are slowing as deep discounters such as Home Depot (NYSE:HD), Lowe's (NYSE:LOW)and Wal-mart (NYSE:WMT) wear away at its business.
Bed Bath & Beyond plans to open 80 to 90 new stores next year, beyond an expected base of 576 at the end of this fiscal year. But its new stores have been a smaller average size than its older stores, and the declining square footage growth could be affecting sales and earnings growth.
Much to its credit, the retailer has kept a squeaky clean balance sheet and funded expansion from operating cash flow. At first blush, that strategy sounds pretty darn good, but it can be a two-edged sword. Cash flow last year grew by 24%, which is not bad, but given the 70% growth of the year before, this year's self-financed expansion will be limited.
The stock, which closed at about $40 yesterday, is near the upper end of its 52-week price range, and for now there seems to be little room for investor optimism. Vigorous growth is already priced as it trades at about 26 times year-ahead earnings estimates. With earnings, sales, and same-store sales continuing to slow down, expect the stock to do so as well.
Carla Pasternak welcomes your feedback at [email protected].
