The market has kicked shares of Bed Bath & Beyond
It's the growth part of the equation that interests me most in the company's latest quarterly conference call. To get a better understanding of these prospects, I've asked Hank Schofield and Bodhi Zappa to join me again in a roundtable discussion.
Jeremy: Co-Chairman Warren Eisenberg states during the latest call, "We are highly confident that our solid growth will continue for years into the future." Pretty bullish remarks, wouldn't you say, Hank? Given your skeptical nature, are you buying it?
Hank: Well, when he made the remark, he was speaking in reference to store-unit growth. To date, the company has roughly 750 stores in operation, and management believes the market can hold approximately 1,300 total in the United States. But if all things remain as they are in the American economy -- land, energy, and raw-material costs, as well as higher interest rates -- my concern is that the cost of opening up the other 550 stores will be substantially higher than it was for the previous 750-plus. That will erode profitability potential and minimize potential shareholder value.
Bodhi: Management acknowledged that the rising costs of raw materials have affected "construction and occupancy costs." In response, and to remain fiscally responsible, the company may have to delay the opening of a number of units, or refrain from opening them altogether. Despite this challenge, the revised unit-growth outlook for fiscal 2006 for 75 to 80 still amounts to about 10% growth in units. Add in solid mid-single-digit same-store sales growth of 3% to 5% on top of the projected unit growth, and the company has a decent shot at achieving mid-teens growth in sales this fiscal year. I'll take that any day.
Jeremy: But what about earnings growth?
Hank: My concern precisely. As a result of higher selling, general, and administrative expenses, management was forced to revise the full-year earnings downward to $2.17 per share, $0.02 below its prior guidance. The primary reasons it offered for the lower operating margins were required accounting changes for stock options and alterations to its compensation program. But the other reasons that full-year SG&A expenses are estimated to be higher are escalating occupancy costs, real estate taxes, utility prices, and paper costs used in advertising. All of those are relevant to what we are seeing in the general economy.
Bodhi: Look, we all know what the challenges are -- every retailer mentions the same ones. Even still, CEO Steven Temares boldly states that this quarter was "the beginning of what we are confident will be our best and most profitable year ever." He even called out several of his competitors, including Pier 1
Jeremy: Tell us more about the competitive advantage, Bodhi. I think this gets us to the reason Ryan Fuhrmann remains bullish on the company despite the market's having turned cold on the stock in recent months.
Bodhi: The competitive advantage is simple: cash. The company hasn't carried debt for more than 10 years and to this day remains debt-free. All the while, it holds $642.3 million in cash and marketable securities, and it has a nice flow of free cash coming in.
Hank: But like Ryan, I am arguing there is still reason to cast a cautious eye. Yes, management was quick to point out in the call that since the company's first-quarter earnings typically account "for the smallest portion of our annual earnings, any de-leveraged items on a percentage of net sales are relatively more pronounced in the first quarter than they would be in any other three quarters." We might assume that this also trickled down to the company's cash flows. So, was this quarter's decline in cash flows simply an anomaly? We don't know. And the market doesn't like not knowing. For that reason, I believe weak hands are ruling trading.
Traders or investors?
Jeremy: Here's a rule for any Foolish investor -- let neither undue applause nor unsubstantiated gnashing of teeth spook you out of an investment. The Motley Fool is about investors writing for investors. That means that while traders may be kicking Bed Bath & Beyond to the curb because free cash flow for the quarter just wasn't up to snuff, or because earnings guidance came up a couple of cents shy of previous forecasts, these are the times investors may want to take a closer look.
I think they will find, as Ryan Fuhrmann and Motley Fool Stock Advisor co-analyst Tom Gardner have both found, that Bed Bath & Beyond is a financially healthy company with plenty of solid growth prospects ahead of it. As the home-furnishings retailer continues to grow organically both here and in the international market, and as potential acquisitions present themselves, there are ample reasons to like the current positioning of Bed Bath & Beyond.
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