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Bed Bath & Beyond Selling Reasonably Priced Growth
Specialty retailer Bed Bath & Beyond (Nasdaq:BBBY) posted another impressive quarter of sales growth. Additionally, as has been its custom, it leveraged this into even higher profit growth. There are few signs that these trends won't continue for the foreseeable future, and a pessimistic view from myopic-minded investors has pushed the valuation into more reasonable territory.
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Third Quarter Recap
Net sales for Bed Bath & Beyond advanced 6.8% to $2.3 billion. The increase stemmed from a 4.1% improvement in comparable store sales and new store openings. Over the past year, BBBY has opened a buybuy BABY location that competes primarily with Babies R Us, though it has also closed a Harmon store. The Harmon concept sells cosmetics and related beauty supplies to compete with the likes of privately-held Sephora, which operates stand-alone locations and inside J.C. Penney (NYSE:JCP) stores, as well as Sally Beauty Holdings (NYSE:SBH).
At the end of the quarter, BBBY operated 1,171 stores, including 993 namesake locations, 71 Christmas Tree Shops, a discount merchandiser similar to Big Lots (NYSE:BIG) or Dollar General (NYSE:DG), 61 buybuy BABY stores and 46 Harmon sites.
Cost controls helped send operating income up an impressive 17% to $357 million for a very healthy operating margin of 15.2% of total sales. Moderate income tax expense growth resulted in net income growth of 21.2% to $228.5 million, while share buybacks boosted earnings per diluted share to 95 cents, or 28.4% ahead of last year's third quarter. (To know more about income statements, read Understanding The Income Statement.)
Outlook
Bed Bath & Beyond increased its full-year earnings guidance to a range of $3.79 and $3.83 per diluted share, which would represent annual growth of as much as 25%. Analysts are currently calling for sales growth of nearly 8% and total sales of $9.4 billion.
The Bottom Line
Despite another strong quarter from Bed Bath & Beyond, the market focused on the fact that comps and sales came in a bit light of expectations, as did the low end of management's fourth quarter forecast. The stock fell more than 6% the day after the release and pushed the forward P/E into more reasonable territory below 13. This still represents an above-average earnings multiple in the retail industry, but could be worth it, as long as BBBY has returned to posting double-digit annual profit gains.
With a number of smaller concepts to supplement the more mature namesake concept, these growth levels look achievable. Better yet, management is easily able to rely on internally-generated funds to grow its store base. The rest is used to aggressively repurchase shares, which further helps the bottom line move ahead. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Third Quarter Recap
Net sales for Bed Bath & Beyond advanced 6.8% to $2.3 billion. The increase stemmed from a 4.1% improvement in comparable store sales and new store openings. Over the past year, BBBY has opened a buybuy BABY location that competes primarily with Babies R Us, though it has also closed a Harmon store. The Harmon concept sells cosmetics and related beauty supplies to compete with the likes of privately-held Sephora, which operates stand-alone locations and inside J.C. Penney (NYSE:JCP) stores, as well as Sally Beauty Holdings (NYSE:SBH).
At the end of the quarter, BBBY operated 1,171 stores, including 993 namesake locations, 71 Christmas Tree Shops, a discount merchandiser similar to Big Lots (NYSE:BIG) or Dollar General (NYSE:DG), 61 buybuy BABY stores and 46 Harmon sites.
Cost controls helped send operating income up an impressive 17% to $357 million for a very healthy operating margin of 15.2% of total sales. Moderate income tax expense growth resulted in net income growth of 21.2% to $228.5 million, while share buybacks boosted earnings per diluted share to 95 cents, or 28.4% ahead of last year's third quarter. (To know more about income statements, read Understanding The Income Statement.)
Bed Bath & Beyond increased its full-year earnings guidance to a range of $3.79 and $3.83 per diluted share, which would represent annual growth of as much as 25%. Analysts are currently calling for sales growth of nearly 8% and total sales of $9.4 billion.
The Bottom Line
Despite another strong quarter from Bed Bath & Beyond, the market focused on the fact that comps and sales came in a bit light of expectations, as did the low end of management's fourth quarter forecast. The stock fell more than 6% the day after the release and pushed the forward P/E into more reasonable territory below 13. This still represents an above-average earnings multiple in the retail industry, but could be worth it, as long as BBBY has returned to posting double-digit annual profit gains.
With a number of smaller concepts to supplement the more mature namesake concept, these growth levels look achievable. Better yet, management is easily able to rely on internally-generated funds to grow its store base. The rest is used to aggressively repurchase shares, which further helps the bottom line move ahead. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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