Great Value at Bed Bath & Beyond, Inc. (Just Give It Time)

Despite a slowdown in growth, Bed Bath & Beyond, Inc. looks like a solid investment opportunity.

Adam Levine-Weinberg
Adam Levine-Weinberg
Apr 14, 2014 at 1:53PM
Consumer Goods

Bed Bath & Beyond (NASDAQ:BBBY) investors have been getting very impatient lately. After shares in the home furnishings giant rallied in the first few years after the Great Recession, stagnation has set in since 2012.

BBBY Chart

Bed Bath & Beyond 5-Year Stock Chart. Source: YCharts.

Like other forward-looking brick-and-mortar retailers, Bed Bath & Beyond is investing heavily in technology in order to keep up with online competitors. To some extent, it is also experiencing gross margin pressure as consumers demand discounts. However, Bed Bath & Beyond is still positioned for long-term success.

Sales growth slowing
Last quarter, Bed Bath & Beyond posted modest 1.7% growth in comparable-store sales. The company was negatively affected by the short holiday shopping period and bad weather in January and February that forced hundreds of stores to close at different times.

The company is projecting that this sluggish sales growth will continue into Q1 of FY 2014, when comparable-store sales are expected to rise 1%-2.5%. However, sales growth should strengthen later in the year, leading to Bed Bath & Beyond's projection for full-year comparable-store sales growth of 3%.

Low-single-digit comparable-store sales growth may be the new normal for Bed Bath & Beyond.

To a large extent, Bed Bath & Beyond's struggles can be blamed on the U.S. consumer spending environment, which remains sluggish. Plenty of department stores have faced weak sales trends recently.

That said, Bed Bath & Beyond has continued to keep comparable-store sales growth and EPS moving in the right direction. The company expects mid-single-digit EPS growth this year, driven by a combination of sales growth and share repurchases, offset by lower margins.

Is margin contraction a concern?
In fact, the main thing holding back Bed Bath & Beyond's earnings has been margin pressure, not weak sales growth. Some of this has come on the revenue side, due to customers trading down to lower price points and higher coupon expense. Both of these issues have been noted on the last couple of earnings calls.

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However, 20%-off coupons have been ubiquitous at Bed Bath & Beyond for a long time, and that hasn't been a problem in the past. So while there may be a small step-down in gross margin -- which declined 0.5% last year and is expected to decline modestly in FY 2014 -- this doesn't seem like a big warning flag. Nevertheless, investors should keep an eye on gross margin to make sure that the declines don't accelerate.

Bed Bath & Beyond 20% off coupons are virtually ubiquitous.

Bed Bath & Beyond's investments in e-commerce and omnichannel initiatives have been an even bigger contributor to margin pressure. Expenses have risen as the company has moved to replatform most of its websites and mobile apps, build a new fulfillment center, and invest in other IT capabilities.

All of these technology investments are expensive, and they don't pay off right away. However, they are preparing the way for the next wave of growth at Bed Bath & Beyond, which will likely be weighted more toward e-commerce than pure in-store transactions.

Foolish bottom line
There's no denying that Bed Bath & Beyond's growth has slowed. However, it remains a high-quality retailer, and it currently trades for about 13 times last year's earnings, making it cheaper than many other slow-growth retailers.

In the next few years, Bed Bath & Beyond should be able to leverage its current technology investments. This will allow it to start expanding its margins again, and it may even bring faster sales growth. Investors who are patient enough to stick around for the long haul are likely to be rewarded.