The valuation headwinds bbby is facing and that the stock is facing is everyone centered around the current valuation as a ‘bargain’ because historically the PE is higher, around 16.x over the last 4 years. With the current EPS that would place the stock price around 72-76. The value trap in that logic is that BBBY is no longer the growing company that it once was. The big driver was formerly from its primary growth engine, BBBY stores. They currently have over 1000 BBBY locations and they’re not going to be ramping that much higher over the next few years. Presumably there are not high volume locations to further expand into but rather strategically supportive locations that will help to saturate mature areas. These will still be profitable but will also detract from some existing store sales. The growth then will be coming from the subsidiary companies; Cost Plus, Linen Holdings, Harmon Cosmetics, Christmas Tree Shops and BuyBuyBaby.
We know BBBY management is one of the best in the business at extracting value from BBBY stores and that type of merchandise segment, specialty home goods. I'm sure they will do well with Cost Plus / World Market due to the similar product mix, but we're talking about a company that already closed down most of its underperforming locations and then BBBY picked them up. If they had already trimmed a lot of fat off prior to sale, How much leaner can they get? How many new store opportunities are there given that they just closed locations to become profitable? The economic environment for an upscale retailer is not what it was 7 years ago, thus Cost Plus's issues in the first place going through the recession. That said, BBBY will definitely find product synergy opportunities between BBBY stores and Cost Plus stores and that should improve margins/ operating cost and I’m sure there are definite operational advantages that BBBY can bring to the table.
I can certainly see great opportunities for these companies to grow but given the lack of transparency from BBBY management about individual segment performance it is difficult to gauge how well they are performing. Based on store count though, Christmas tree shops was purchased in 2003 and there are only about 74 stores, BUYBUYBaby was purchased in 2007 and there are only about 78 of those. (Pulled from BBBY Q3 2012 ER) Obviously as investors we would like to see better growth out of those engines, I doubt a BUYBUYBaby or Christmas Tree Shop store does equivalent business to a BBBY store, given the size differences in square footage and Christmas Tree Shops selling more low end products, anecdotally those 150 stores might only be equivalent to 100 BBBY stores, which is less than 10% of BBBY store count. Not exactly a large additional growth machine at present.
Over the past year we saw what happened as BBBY stock crested into the mid 70/share range, it got smashed twice. BBBY continues to experience margin erosion and will continue to see more as they grow Cost Plus as Cost Plus stores have a lower net margin than BBBY stores.
Margin issues and growth issues, that’s why this stock is not in the 70s even with the current market runup. One of the finer points of BBBY management has always been the debt free style of business operation, and in turn they use free cash flow to buy back stock and return share holder value. On the latest conference call they announced a new 2.5 billion share buyback over the next 3 years, which is mostly likely why the stock held the strong support at 55. On the other hand they also announced comparative store sales growth of only 1.7% (would have been 2.6% without Hurricane Sandy according to BBBY management). The stock has been range bound as of late not breaking out over 60. I said in a previous post, probably over a month ago, its going to be the same coin flip next ER, did comps go up/ how has margin been affected. However, there won’t be a new buyback announced next ER.
My position is not long or short. I am a huge fan of BBBY and BBBY management, I think this company will continue to do well in the long term. I’m in this game to make MONEY so regardless of my feelings on the long term prospects of the company, the stock is FAIRLY priced right now, established mature retailers like TGT or WMT also have 13/14 PE’s. I’m trying to facilitate a discussion here so by all means please respond with comments.
Great post, very well thought-out and reasoned and I agree with your premise. My take on BBBY is as a "value-play" that hasn't gotten to the value-level I want just yet. I see very good growth in that BuyBuyBaby, that can be a monster, imo. Also, I wouldn't over-look growth in the Cost-Plus/World Market arena. In fact, if you look at BBBY's porfolio of brands, what they actually sell, is what "people really want". I enjoyed the World-Market that was located in Memphis where I live, just across the street from BBBY, but it closed-down during their failure, before BBBY picked-them-up. Think "Trader-Joe's" potential going forward, imo. Point being, I think there are some awesome "growth engines" under the BBBY brand, that haven't even begun to be un-locked. We didn't even mention the lack of real web-sales growth! They need to concentrate on that 1000%! Get it up to William-Sanoma percentage of revenues, then you'd see great value un-locked with the BBBY brand!
No, you won't see the same growth with BBBY as you mention! That hay-day of growth is over....I concur. But you haven't seen ANY REAL GROWTH yet out of BuyBuyBaby (a huge, under-served market, on the higher-end level, opposite Baby-R-Us, which caters to the lower-end!) I'm not saying that they are going to turn these "potentials into" everything they could be, but if they do execute to their potential, you'll have BBBY-style growth, which was experienced from the beginning, all over again, imo!
I like management's opaque reporting style actually! Why? B/c Wall-Street pundits want to over-analyze every detail that can be "betted for or against"; NO DEBT model! Winner! Buying-back shares, winner! "We know what's best for our business by management/ownership, go with us or against us". Wall-Street crooks----best, when it real, and with BBBY, it's real baby!
But, it's easy to get overly-excited. Again, I'm waiting for "deep-value" and if the great growth come, good, and if not, strong EPS
Strong and continued EPS levels should reward the value one might hope to pick-up. I think if Wall-Street remains focused on BBBY-only stores and misses "all the other goodies", then that would be good for getting this at a value-level patient, new-entry level investors may hope!
Actually, into the $40's would be nice! I'd hold-out to see what 4/10/13 brings...and wait-and-watch for "real and deep value"! Who knows, maybe the potential will exist to pick-up some BBBY stock in the bargain-basement-bin! I hope so! GLTA!
PS: Good write-up in this week's Barron's on this story stock, and they like it at $70 next year!
I think the Cost Plus acquisition was a good one. Personally I love shopping at World Market, and think it’s a good compliment to BBBY. And it shows they are deploying their cash in a way that further diversifies their retail portfolio – while sticking to the same type of merchandising that they excel at.
With regards to Amazon poaching their sales, personally I think such analysis is overblown for a multitude of reasons. Some include:
1. Most people who go to Bed Bath and Beyond I don’t think are buying high priced electronic gadgets, like at Best Buy.
2. Amazon now charges sales tax, so this removes a competitive advantage it had over retailers
3. Personally, I tried shopping on Amazon to buy some household items when I moved. I purchased a new bed quilt, shower curtains, etc. I found the experience to be very “hit-or-miss”. Sometimes what appears one way in a photo, looks another way in person. Personally, I’d rather just have the retail experience for this.
4. I think when most people go to Bed Bath and Beyond, they may be looking for specific things, but then get lured to buy other things. Usually these are impulsive buys at a smaller price point. I doubt people are going to comparison shop on Amazon and wait for days, even if they do end up saving a nominal amount of money.
5. I find the prices at Cost Plus are very competitive, and doubt I’d want to go buy the food and alcohol items on Amazon
6. During the financial crisis, BBBY earnings kept going up. Any retail company tied to housing that could do well in that environment, I think must be doing something right. People forget how really bad it was back then.
7. BBBY has been investing in its online and distribution capabilities
I also like the fact that the company is extremely disciplined and operates very profitably with zero debt. Particularly when it’s at a historical low multiple. Even if its growth rate cut in half, I still think it would be decent at this price. JMHO.
Few responses to your points
1. Small home appliances/seasonal appliances and personal care electrics make up a substantial portion of their business so that is certainly at risk of losing sales to amazon.
2. Amazon is still not charging sales tax in all states but It seems likely they will soon.
5. The issue is can Cost Plus be a large enough growth engine to offset the stagnating sales at BBBY stores, there are only 200ish Cost Plus stores and over 1000 BBBY stores.
6. During the financial crisis BBBY benefited from the liquidation of Linen N Things. BBBY was the dominant player in the space for sure but they caught an enormous break with LNT going under. BBBY was prepared and capable of handling the downturn due to no debt/ cash on hand but they weren't really tested at all.
7. If comparative stores sales are only comping
BBBY needs to start paying dividend. They are buying back the shares. While that is good for shareholders, I think all the stockholders really want is the dividend. I am sure BBBY can do this; their financial statements say they can.
Thanks for the in-depth analysis. I was thinking of getting back in, the stock was very good for me years ago.
Obviously management has been very good with BBBY, but I wonder if they can handle all they new corporate entities. Would they be able to manage a conglomorate?
What has been shown thus far is that the companies that have been acquired have been a mixed bag. I would say Harmon Cosmetics and Xmas Tree Shops haven't really amounted to much and while BuyBuyBaby is growing the fastest it is still not so fast that its going to counteract the margin erosion/ flattening bbby store comps.
Check yahoo summary page for the articles showing that BBBY is now ranked #23(I think) most shorted stocks and that bbby is also the most in danger of getting sales poached by Amazon. If that research firm has any accuracy when do you think bbby is going to get hurt the worst on poached sales... Q4 holiday sales most likely.... The short interest is also concerning because that may be one or several large institutions building those positions, definitely not a good sign as the stock price is range bound with major support @ 55- and major resistance @60 and news that Einhorn or some other big name is shorting would knock this down hard.
Trying to play around an ER is generally more gambling than investing. If I had to choose a side on this go around I'd probably go short, its q4 and 2012 full year report, nothing but a sizeable beat/ good guidance is really going to propel this upward since analysts and bbby management have both trimmed their 2012 estimates. Based on the comps that we've seen the last few quarters/ rising short interest/ Amazon threat (remember if the media hypes this it doesnt matter how true it is, it may drive short interest up, if more people are selling shares to short then it can drive pps down) I wouldn't be going long until after the report gives better color to some of these issues.