Bed Bath & Beyond's
Not too long ago, the market could count on 20%-30% top- and bottom-line growth at Bed Bath. Indeed, over the past decade sales have grown 25.5% per year on average while earnings have grown 29.7% over that time frame. But now, investors are grappling with the fact that growth has slowed considerably. Instead of hypergrowth, Bed Bath will likely grow 10%-12% going forward, with the occasional dip into the single digits.
On the plus side, Bed Bath's earnings and other multiples have come down as growth has slowed. Back in 1999 the stock traded at over 40 times earnings, which increased to over 50 times in 2001 but has fallen steadily since to a current 20 times. Based off of analyst projections for fiscal 2007, the stock will only trade at 16.3 times earnings.
That's not too bad, and Bed Bath can still grow for the foreseeable future. With 813 stores currently, management estimates it can operate up to 1,300 before market saturation realities kick in. If it continues its pace of opening 70 stores per year, that's another seven years of expansion. And if you know anything about retail, the estimated store saturation point is usually ratcheted upwards as companies hit the top end of their previous ranges.
Shares of Bed Bath are trading down about 4% today after the company released third-quarter earnings that confirmed growth prospects aren't as rosy as they used to be. Our recent Fool by Numbers will walk you through the specifics, but in a nutshell sales and earnings grew slightly more than 11%, and management expects more of the same next year.
My main concern so far this year has been weak operating cash flow. A ramp-up in capital expenditures hit first-quarter figures, and higher inventory hit the numbers this quarter. I'll withhold judgment until full-year results are released, but if cash flow generation is indeed weakening I may have to change my opinion on the company. At least management expressed confidence in its future prospects by announcing a significant $1 billion share repurchase program, which will help the bottom-line per share numbers going forward.
Bearish investors see a continued trend of slowing growth and decreasing profitability. If that ends up being the case, the stock is expensive at these levels. But Bed Bath has no long-term debt and is known as one of the better-run retailers out there. My money is on 10% or more growth for at least the next five years, in which case Bed Bath should duly reward long-term shareholders.
I see Bed Bath in a similar vein to AutoZone
For related Foolishness:
AutoZone and Bed Bath & Beyond are Motley Fool Inside Value picks. Bed Bath & Beyond is also a Stock Advisor selection.
Fool contributor Ryan Fuhrmann is long shares of Bed Bath but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
