DanielGMask Posted July 9, 2014 Share Posted July 9, 2014 I've noticed there's no thread for BBBY and I'm interested in the company. What do you guys think about this one? Do you know of any articles or valuation analysis out there? Greetings ;-) Link to comment Share on other sites More sharing options...
dwy000 Posted July 9, 2014 Share Posted July 9, 2014 I wondered when someone would throw this up as a category. There's a whole lot to like at today's prices. The company has zero debt, throws off prodigious amounts of free cash flow (like $600-$800M per year) and uses it entirely to repurchase debt. While they've been clobbered for missing estimates, same store sales continue to grow (albeit more slowly than planned). The margins have taken a hit recently as they've had to increase couponing to keep the customer flow. In addition the inventories took a surprising step up this year without much justification. They've been investing heavily in the distribution and online capacity which has hurt free cash flow a bit. But overall this is a pretty well managed company in a tough, tough segment. The balance sheet is rock solid and they have been very shareholder friendly. Even if growth stops and they just milk cash flow for a few years it's hard to see how today's price isn't a floor with lots of upside if they can stabilize margins and get back to slow but steady growth. Link to comment Share on other sites More sharing options...
dwy000 Posted July 9, 2014 Share Posted July 9, 2014 Typo - they repurchase shares not debt (there is no debt). Link to comment Share on other sites More sharing options...
xxx1313 Posted July 9, 2014 Share Posted July 9, 2014 German value boutique ACATIS bought some BBBY stock in June: "Purchases in the international equity funds • Bed Bath & Beyond: Bed Bath & Beyond is an American retailer which offers particularly furnishings in the areas of bathroom, bedroom, kitchen and dining room. The share price has come under pressure after increased investment in the expansion of the online business, which resulted in a decrease in operating margin. We consider the decline as only temporary and expect higher margins in the medium term. The rating is currently at an historic low (PER 2015e 11.5)." Link to comment Share on other sites More sharing options...
frommi Posted July 9, 2014 Share Posted July 9, 2014 Is it possible that IKEA is starting to get a part of BBBY business? I know IKEA from europe where its nearly the only good lowcost furniture shop available and it looks like they have an expansion plan running in the USA. But nontheless BBBY is a great company, i can`t really see if IKEA is a threat or not, that was just my first thought when i looked at the last numbers. Link to comment Share on other sites More sharing options...
dwy000 Posted July 9, 2014 Share Posted July 9, 2014 There may be overlap with IKEA at the very edges but I think it's a different market. BBBY doesn't sell furniture - it's where you go for a new coffee maker, sheets and to stock up your kid's dorm room. It's brand names. IKEA sells some of this stuff but largely as an adjunct to their furniture. The bigger competition is from Target and JCPenney and such (plus online thru Amazon). Link to comment Share on other sites More sharing options...
HJ Posted July 9, 2014 Share Posted July 9, 2014 Even if one were to view IKEA as a comp to this business, it should be viewed as a pretty good comment about the profitability of this particular retail category that it can spring forth one of the richest guy in the world (as opposed to the retail category of books or electronics, which has been destroying wealth ever since the advent of Amazon). The proper comparison is probably more William Sonoma (WSM) and Container Store (TCS), which just announced bad numbers today. I'm no expert on retail, and am interested in learning more. Purely on valuation, this looks pretty cheap. At 7.5x pretax, it trades like a capital intensive commodity chemicals business, when it has no long term debt (other than operating leases) and 40% gross margin. For what it's worth, I compiled the following future lease obligation metrics as an attempt to quantify their real estate operation. As you can tell, they are doing very different things than either William Sonoma or Container. Not a mall based retailer. WSM Container BBBY Future Lease Obligation 1,431,599 493,731 3,591,932 Store Count (end of yr) 585 63 1,496 Sqr footage 5,838,000 1,100,000 42,619,000 Lease / Store 2,447 7,837 2,401 Lease / Sqr Ft 245.22 448.85 84.28 I think one of the big question is whether the current lull is more cyclical (weather, product cycle, slow economic growth 1st half) or secular (Amazon, internet, or just losing share to WSM). It feels like they attract a "lower rung" of customer than the comps. Link to comment Share on other sites More sharing options...
DCG Posted July 9, 2014 Share Posted July 9, 2014 I don't think Ikea is a good comparison. I'd think Amazon would put a much bigger dent in their business than Ikea. Link to comment Share on other sites More sharing options...
HJ Posted July 9, 2014 Share Posted July 9, 2014 I don't think Ikea is a good comparison. I'd think Amazon would put a much bigger dent in their business than Ikea. I think that's the fear. The question is is it already in the price? Link to comment Share on other sites More sharing options...
Phaceliacapital Posted July 9, 2014 Share Posted July 9, 2014 http://abcnews.go.com/blogs/business/2013/08/bed-bath-beyond-beats-amazon-in-prices-analysis-finds/ + they also do in-store coupon and similar promotions. Link to comment Share on other sites More sharing options...
HJ Posted July 9, 2014 Share Posted July 9, 2014 Here's a blog post that I found pretty informative, quite bullish on it as a retailer. http://www.kurtsalmon.com/US/vertical-insight/Bed-Bath-%26-Beyond%E2%80%99s-Unlikely-Success?vertical=Retail&id=265&language=en-us And this seekingalpha article summarizes the bullish thesis pretty well as well. http://seekingalpha.com/article/2293985-bed-bath-and-beyond-has-a-compelling-opportunity-here-and-now There is also a Harvard Business School Case study, comparing BBBY with Linen'N Things, both late 70's creation focused on home furnishing category: http://hbr.org/product/let-s-take-this-private-linens-n-things-versus-bed-bath-beyond/an/909M61-PDF-ENG Among all these articles, they make reference to a unique decentralized operating model for BBBY, not building a distribution center, and allowing individual store managers to order directly from the suppliers. I'd love to learn more about is particular operating aspect of the business, its pros and cons. My personal thesis is that a resurgent Pier 1, JCP has been taking a bit of share lately, but the decline of Sears and demolishing of Linen"N Things, has helped them in the years prior. As long as the competition is in these physical stores, Walmart, Target and Costco are not "existential" threats to BBBY. Those stores are using grocery to drive traffic into their stores, sacrificing margin there to make money here, so they are going to be "rational competitors" margin wise for this category. Another good aspect here is that there is no fashion risk in this category, unlike the apparel retailers, yet you still make similar gross margins. It does have a bit of "product cycle" in that them being an early distributor of Kerug and Sodastream machines may have goosed sales a bit in years past, which they need to overcome now same store comp wise. But I think I can get comfortable that as long as the category remain mostly physical stores, it's more than priced in at the current valuation. The overarching bearish thesis to this business is the existential online threat. I'd love to find any studies or numbers to either support or against the thesis, which I have not found any so far. Link to comment Share on other sites More sharing options...
DanielGMask Posted July 10, 2014 Author Share Posted July 10, 2014 Good links "HJ"! I see almost all of you are bullish on this one, just like me. Are there any bears? What's the bear thesis? Link to comment Share on other sites More sharing options...
giofranchi Posted July 10, 2014 Share Posted July 10, 2014 Good links "HJ"! I see almost all of you are bullish on this one, just like me. Are there any bears? What's the bear thesis? I don’t like the retail business in general… imo it is too much subject to changes… changes that I cannot foresee… That’s why I have always stayed away from SHLD too. This being said, BBBY is still run by its very capable founder. And anyone cannot but admire his great business accomplishments. Let’s just say it is exactly the sort of entrepreneur I would like to partner with… in a business too uncertain for my tastes. And the reason I run such a concentrated portfolio is mostly because I require both things: 1) a great entrepreneur to partner with, and 2) a predictable business. Gio Link to comment Share on other sites More sharing options...
jtvalue Posted July 10, 2014 Share Posted July 10, 2014 I'll give my 2 cents as a buy-side consumer analyst on Wall Street. I'm very concerned about the future of retailers. Depending on the category E-commerce is now 4-20% of the market and is growing 10-15% y/y. If overall retail is growing 2% that means E-commerce is taking 20% to over 100% of that growth. If brick and mortar retailers don't generate growth, their margins deleverage as their costs (leases, labor, etc) grow in-line with inflation. Bed Bath and Beyond currently has 14% OM's while AMZN is currently competing on 1% margins. Retailers are also leveraged entities, when you adjust for the leases, debt is generally 2-3x EBITDAR. I highly recommend that anyone investing in retail read this book first. http://www.amazon.com/Everything-Store-Jeff-Bezos-Amazon-ebook/dp/B00BWQW73E/ref=sr_1_1?s=books&ie=UTF8&qid=1404998194&sr=1-1&keywords=the+everything+store Link to comment Share on other sites More sharing options...
dwy000 Posted July 10, 2014 Share Posted July 10, 2014 That's absolutely the risk in retail - that your shoppers will move online. Part of the question in my mind is where they go to shop online. If everyone only uses amazon then all retailers are at risk. But if they are shopping at the same retailer, just online, then that's good for the retailer (didn't WalMart's online sales grow 30% last year?). BBBY has been investing heavily in online capabilities over the past year or two so hopefully this will pick up some of the SSS slack. And Google Express is directly challenging amazon by partnering with bricks and mortar stores to provide same day delivery. At today's price even a flat top line and some stabilization of the margins make this fairly low risk in my mind. But that is the risk. If Amazon puts every retailer in jeopardy then there is downside. Link to comment Share on other sites More sharing options...
Liberty Posted July 10, 2014 Share Posted July 10, 2014 That's absolutely the risk in retail - that your shoppers will move online. Part of the question in my mind is where they go to shop online. If everyone only uses amazon then all retailers are at risk. But if they are shopping at the same retailer, just online, then that's good for the retailer (didn't WalMart's online sales grow 30% last year?). BBBY has been investing heavily in online capabilities over the past year or two so hopefully this will pick up some of the SSS slack. And Google Express is directly challenging amazon by partnering with bricks and mortar stores to provide same day delivery. At today's price even a flat top line and some stabilization of the margins make this fairly low risk in my mind. But that is the risk. If Amazon puts every retailer in jeopardy then there is downside. IMO eventually Amazon will release its Firefly shopping app to all platforms (once they realize that their Fire phone is doomed to niche status) and there will be a lot more 'showrooming' going on, as long as Amazon has better prices. Others can make great ecommerce sites if they want, but if they want to maintain their margins, it means that amazon will have a price advantage, and if there's very little friction finding what you see in the other store on amazon, that'll hurt. Not everybody will do that, but probably enough people for it to matter... Link to comment Share on other sites More sharing options...
DCG Posted July 10, 2014 Share Posted July 10, 2014 I don't think Ikea is a good comparison. I'd think Amazon would put a much bigger dent in their business than Ikea. I think that's the fear. The question is is it already in the price? Not sure. I haven't done much research on BBBY, but I know what pretty much everything we used to buy at Bed Bath & Beyond, we now order from Amazon. Link to comment Share on other sites More sharing options...
kfh227 Posted July 10, 2014 Share Posted July 10, 2014 The one thing I know about BBBY is that everytime I go in a store, people are there buying. And they are FCF positive. I see correlation that is probably causation based. I bought a frying pan there recently. It's not the kind of thing I buy online. I want to actually touch it and see that it is to my liking. Yes, things are going to the internet but some things like couches never will because people don't buy such items without trying them out first. And everything will not go to the internet. If that were to happen, people would go to work and go home and that's it. Shopping in itself is an experience. I'd rather pay an extra 5% and get out of the house. I'd go as far as to say that it is a form of socialization more so than entertainment but there is probably a blend of the two psychologically. And I'm sure this psychological bias is true in everyone to some extent. Point is, it's not all dollars and cents to everyone all the time. To me, I'd like to see what the bed linens look and FEEL like in person. I'd like to see how big that stainless steel kitchen garbage can is. I'd like to touch the pots and pans. Feel how heavy they are. How the handle construction is, etc. As an aside ... I am praying that this company will go public one day: http://www.raymourflanigan.com/Detailed-History.aspx Link to comment Share on other sites More sharing options...
dwy000 Posted July 10, 2014 Share Posted July 10, 2014 I'm like you kfh227 (maybe to my detriment on BBBY) - there's an experience that can't be replicated online. I'm an active Amazon user but only for certain things. My wife will go shopping with her friends for hours - its a social thing more than needs based. There's also something to be said for walking out the door with it. If I'm in Home Depot and see a tool or outdoor item I like, unless it's a big ticket item, the price differential on Amazon isn't worth the pleasure of taking it home and using it right away. Link to comment Share on other sites More sharing options...
HJ Posted July 10, 2014 Share Posted July 10, 2014 I'll give my 2 cents as a buy-side consumer analyst on Wall Street. I'm very concerned about the future of retailers. Depending on the category E-commerce is now 4-20% of the market and is growing 10-15% y/y. If overall retail is growing 2% that means E-commerce is taking 20% to over 100% of that growth. If brick and mortar retailers don't generate growth, their margins deleverage as their costs (leases, labor, etc) grow in-line with inflation. Bed Bath and Beyond currently has 14% OM's while AMZN is currently competing on 1% margins. Retailers are also leveraged entities, when you adjust for the leases, debt is generally 2-3x EBITDAR. I highly recommend that anyone investing in retail read this book first. http://www.amazon.com/Everything-Store-Jeff-Bezos-Amazon-ebook/dp/B00BWQW73E/ref=sr_1_1?s=books&ie=UTF8&qid=1404998194&sr=1-1&keywords=the+everything+store jtvalue, do you ever come across data or study on this specific retail category, i.e. home furnishing online vs. offline, absolute size, the rate of migration, etc? There are certainly annecdotal evidence that people are doing that. The question I am really trying to grapple with is what is the rate of that deterioration, measured against the speed of buy back that these guys are doing. All the links that I have posted previously are all backward looking, so sure they have been very successful, and we can all pontificate on why they have been successful, but the counterpoint is exactly that all the competition is so far physical. If people's shopping habbits are changing then all of their previously demonstrable merchandising skills, real estate strategy, etc. simply doensn't really matter to prospective returns. In your analysis, is there any hope for any kind of physical retail, maybe with the exception of grocery, in the future? What does the future of physical retail look like? Link to comment Share on other sites More sharing options...
DanielGMask Posted July 11, 2014 Author Share Posted July 11, 2014 I've just read this "also bullish" piece about the company: http://www.valuewalk.com/2014/07/jonathan-booth-on-gm-and-why-bbby-reminds-him-of-brk/ Link to comment Share on other sites More sharing options...
DanielGMask Posted July 12, 2014 Author Share Posted July 12, 2014 This is getting too crowded, now is Barron's who's recommending to buy the stock in this week's cover story, even suggesting it may be an interesting BRK addition. http://m.barrons.com/articles/SB50001424053111903684104580015193866353332 Link to comment Share on other sites More sharing options...
dwy000 Posted July 14, 2014 Share Posted July 14, 2014 $1.5bn bond issuance announced - to fund stock buybacks. S&P raised rating to A-. Link to comment Share on other sites More sharing options...
HJ Posted July 15, 2014 Share Posted July 15, 2014 The counterpoint to the Barrons article: http://www.forbes.com/sites/johntobey/2014/07/14/retail-stocks-underperformance-opportunity-warning-or-simply-reality/ The fact that the Barrons article mentions several retail stocks as a group makes me feel a bit better. It is an interesting exercise to actually compare the operating / valuation stats on the 6 mentioned stocks and think through the valuation issues. It is also notable that short interest in all of them has increased quite a bit recently. Link to comment Share on other sites More sharing options...
DanielGMask Posted July 15, 2014 Author Share Posted July 15, 2014 Something to ponder! I think the Forbes piece may explain why what seems to be 1) a real trend and 2) over expansion in many areas, is affecting the whole industry; but I'm not sure it applies to every company within the industry. By the way, the Barron's article also mentions WFM, which I also like! Link to comment Share on other sites More sharing options...
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