BBBY - Bed Bath & Beyond

[jtvalue]

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?

 

There is hope for retailers depending on 1) the category they operate in, 2) do they have exclusive control of the brands they sell?, and 3) how they evolve to an Omni-channel strategy. Retailers need great websites and apps that work seamlessly across devices.  They need to be price competitive with online only players.  They need to offer free shipping options, buy online pick up in store, and ship from store capabilities.  They also need to be very disciplined about new store openings and potentially closings. If this means taking down their margins in the near term, so be it.  It's better than losing massive amounts of market share long-term.       

 

I don't want to talk you guys out of this one as a specific investment.  It's cheap and they have a great long-term track record.  I was just trying to point out the long-term risks in retail in general right now.   

[HJ]

There is hope for retailers depending on 1) the category they operate in, 2) do they have exclusive control of the brands they sell?, and 3) how they evolve to an Omni-channel strategy. Retailers need great websites and apps that work seamlessly across devices.  They need to be price competitive with online only players.  They need to offer free shipping options, buy online pick up in store, and ship from store capabilities.  They also need to be very disciplined about new store openings and potentially closings. If this means taking down their margins in the near term, so be it.  It's better than losing massive amounts of market share long-term.       

 

I don't want to talk you guys out of this one as a specific investment.  It's cheap and they have a great long-term track record.  I was just trying to point out the long-term risks in retail in general right now. 

 

No, I don't think people on this board are that easily influenced one way or another.  I think we all appreciate thoughtful perspectives when thinking through issues that these businesses face and how they impact valuations. 

 

I'm actually pretty new to retail, but as I have been studying the historical filings for a couple of text book "Amazoned" businesses, BKS and BBY, I increasingly feel like maybe online is not the main "reason" per se that are driving buying away from physical retail, but just a symptom of the fact that those 2 businesses missed or just don't have a "product cycle" in their space, much like an apparel retailers may have missed some important fashion trends. 

 

Certainly in the case of Best Buy, one theory goes that electronics is a product category that can go online more easily.  But as I reflect on what has happened in that space, I can't help wondering how much has the flat screen TV product cycle changed the category, and more importantly, how much has the rise of Apple changed the landscape of that category.  iPhone replaced so many different electronics gadgets, electronic organizers, cameras, walkman, and then people migrating away from PCs into Macs.  Maybe the greater sin is not that BBY couldn't compete online with Amazon, but that they just had no shot at keeping up with the product cycle of their space, namely Apple products.  In fact, physical retail is so important to Apple, that Apple went into the retail business itself.  Not clear at all that the future of electronics will be all Amazon. 

 

In the case of BKS, during the years that JK Rowling was pumping out those Harry Potter books, the revenue decline was visibly slower than otherwise.  And it just seems like there hasn't really been a series of books that had the impact those Harry Potter books had since then.  Online paperback doesn't really have the price advantage over physical bookstore these days, but it's absolutely true that in my household we hardly buy books at a physical store anymore. 

 

Which brings back, in the case of BBBY, to the Kerug coffee machines and Soda Stream.  Green Mountain had annual sales of $4 billion last couple of years, and Soda Stream, $500MM.  I have seen 10% quoted as BBBY's market share in general home furnishing category.  BBBY was an early distributor for both of those, which could have captured significantly more than that share in the early years.  So those 2 product alone could have accounted for something like $450MM +/- of the $11 billion annual sales at BBBY, maybe even more.  As BBBY lose market share in those 2 products, because other stores are now carrying them, that alone could easy explain something like 0.5%-1% of the same store comps.  By the way, on an informal poll of people around me on where they bought their coffee machine, a surprisingly large 60% bought at Bed Bath & Beyond, Target next, and only 2 out of 15 family I asked bought their coffee machine online.  This is clearly not scientific, but my wife tells me for whatever reason she just doesn't really care to buy that from Amazon, but for stuff like books, etc., she doesn't think twice.

 

Other than piecing together information from company filings, is there other data source that people use to dig out sales information / product cycle type of information?

 

[dwy000]

Decent quarterly numbers.  Same store sales up.  $1bn of stock repurchased in 2Q alone.  I continue to believe this is one of the better run and most shareholder friendly retailers out there.

[cubsfan]

Decent quarterly numbers.  Same store sales up.  $1bn of stock repurchased in 2Q alone.  I continue to believe this is one of the better run and most shareholder friendly retailers out there.

 

If I read this right - they bought back almost 10% of their outstanding shares in 1 quarter - amazing!

 

16.9M shares bought on 198M shares outstanding - 8.5%

[zizou]

Curious if BBBY is interesting to other members? They are buying back another $2.5B over the next 3 years.

They look very cheap on cash yield basis. They continue to expand their digital/online presence or contribution.

Admittedly, competition will only get more fierce but they seem very well managed and are holding up pretty well as evidenced by their margins etc.

Balance sheet looks great to me. Management seems very competent and seem to demonstrate commitment to rightsize business and shrink if needed to create value.

 

 

[asterisk]

I agree on the coupons. I get a few a week sent to my apartment. Ikea would not be a comp due to their core businesses being different. Target would be very comparable and have similar customer demographics.

 

So essentially we would have to get a rough idea of how long the online investment will take and how long until it is bringing in cash flows.

 

In the amazon debate, an important concept to consider is convenience. Amazon takes either two days with Prime or even more with other shipping options. If you are looking to get the coffee maker that just took a $hit then bed bath and beyond is a quick fix. Amazon's achilles heel is convenience for everyday items.

[DanielGMask]

Curious if BBBY is interesting to other members? They are buying back another $2.5B over the next 3 years.

They look very cheap on cash yield basis. They continue to expand their digital/online presence or contribution.

Admittedly, competition will only get more fierce but they seem very well managed and are holding up pretty well as evidenced by their margins etc.

Balance sheet looks great to me. Management seems very competent and seem to demonstrate commitment to rightsize business and shrink if needed to create value.

 

I'm a shareholder and have increased my position in a sizable manner during this past weeks. Management is very competent and shareholder oriented, the business model seems sustainable and the brand is very well positioned. If you have the time, read Howard Mark's latest memo and you'll grasp a concept I found describes the retail sector these days "The same news may be viewed as negative or positive depending on the mood of investors".

[Guest neiljgsingh]

From the latest Q: " For the nine months ended November 28, 2015, comparable sales consummated through customer facing online websites and mobile applications increased approximately 30% over the corresponding nine month period in the prior year, while comparable sales consummated in-store declined in the low single-digit percentage range."

 

Not surprising and has been happening for sometime now. I'm curious to see if people are concerned about the risk that Amazon, Wayfair, etc. pose to these online growth figures.

[dwy000]

From the latest Q: " For the nine months ended November 28, 2015, comparable sales consummated through customer facing online websites and mobile applications increased approximately 30% over the corresponding nine month period in the prior year, while comparable sales consummated in-store declined in the low single-digit percentage range."

 

Not surprising and has been happening for sometime now. I'm curious to see if people are concerned about the risk that Amazon, Wayfair, etc. pose to these online growth figures.

 

I'm less concerned about the impact on the online growth - online will continue to grow, largely because it's starting from such a low base - than I'm concerned about margins.  Same store sales (which includes online) have slowed but continue to grow.  What's killing the earnings and cash flow are the margins which have been shrinking regularly.  The free cash flow has been whacked over the past 2 years and that's what originally attracted me to the stock.  Despite buying back almost 20% of shares, eps and cash flow per share continue to decline.

[WeiChiLoh]

What worries me the most in this name is historical margins were held up by SG&A cuts. Gross margins are deteriorating. Also, the company is getting more levered from an operating leases standpoint which can quickly work against the company.

[DanielGMask]

From the latest Q: " For the nine months ended November 28, 2015, comparable sales consummated through customer facing online websites and mobile applications increased approximately 30% over the corresponding nine month period in the prior year, while comparable sales consummated in-store declined in the low single-digit percentage range."

 

Not surprising and has been happening for sometime now. I'm curious to see if people are concerned about the risk that Amazon, Wayfair, etc. pose to these online growth figures.

 

Online has to grow if they manage to get into consumer's top of mind. Amazon is already there, BBBY may or may not be another option. Anyway, I don't think the world and our way of life is going 100% online and some retail stocks are priced for that reality. I'm a shareholder and of course I'm worried about BBBY's capacity to compete in today's market (deteriorating margins), but I think they will manage to do it. Management is shareholder friendly, knows the industry pretty well and is long-term oriented, we'll see!

[Snorky]

The stocks looks quite compelling at these levels. The FCF / EV and some other metrics are looking really good because of the very nice FCF. The repurchase program is working also very good at these levels...what are the risks beside the normal retailer risks ?!

[valueyoda]

This is exactly the point. The stock has looked appealing on all those metrics for quite some time, and yet free cash flow keeps shrinking, despite relatively stable per share metrics. It is a bigger question we all have to ask ourselves when it comes to cheap retailers in the coming years, on they can remain relevant in the consumer mind in a changing competitive environment. Once they have addressed those existential issues, it becomes interesting to own shares.

[Snorky]

Hey guys.

Someone was so kind to post the Morningstar Thesis of some Stocks here (I think it was roark33)

 

Since BBBY has got a five star rating, does anyone by any change have acsess to a premium morningstar account and can post here the analyst report on BBBY ?

[Guest roark33]

I think this company is in a pretty crappy competitive position, just my two cents:

 

Bed Bath & Beyond is one of the better-operated companies in the retail industry. It has a best-in-class decentralized merchandising strategy, an improving omnichannel presence, untapped international growth opportunities, and widely recognized retail brands like the namesake Bed Bath & Beyond and Cost Plus concepts. Management has constructed a unique store layout that groups related product lines into separate areas, creating the appearance and feel of a collection of individual specialty stores. This store layout, which allows store managers to tailor the merchandise mix and respond to changing trends and conditions, has historically been prudent; the firm has generated average sales per square foot of $277 over the past three years.

 

Mobile and web growth indicate that customer-led initiatives are taking hold and that such investments have a longer-term payoff for brand equity, likely positioning the business more strategically ahead. Merchandise initiatives to increase brand loyalty, including offering exclusive product, private label, and quality for value, make the customer base stickier over time, and investments in point-of-sale and analytic programs will help deliver these products to the right place at the right time. Remaining successful, however, will require investment that should be inflated to historical levels in order to remain relevant and visible to protect market share. This could pressure operating margins, leading to structurally lower results than in the past.

 

The firm remains pressured by declining secular trends, including lower foot traffic as more sales move online and increased pricing pressure among competitors; however, we still think the business model remains valid. While we have operating margins remaining depressed relative to historic levels (at below 10%), we expect free cash flow generation to remain solid over the next five years, providing some impetus for a higher dividend payout. And we think Bed Bath will be able to continue to return capital to shareholders despite capital expenditures that should remain around 3% of sales, as the firm attempts to keep up with evolving consumer demands.

 

Economic Moat 04/06/2017

We do not believe Bed Bath & Beyond has established an economic moat, given the brand's limited pricing power, nonexistent consumer switching costs, and unsustainable cost advantages. As the company competes in largely commodified retail categories with ample domestic brick-and-mortar and online rivals, we believe the lack of moat has become evident in the frequency and size of couponing, which underscores a consistently promotional environment (with few indications of an immediate reversal) and the price-sensitivity of the consumer base, which has easy access to pricing comparisons through use of smartphones and other handheld devices. Despite the ability to substitute, the company still holds a decent position in the more than $109 billion domestic home furnishing retail category (using U.S. Census retail sales statistics), with approximately 11% share. While our model currently forecasts low-double-digit returns on invested capital, ahead of our 8.3% cost of capital assumption, we remain concerned that this metric will be constrained by a secular decline across much of the brick-and-mortar retail landscape due to increased price competition with online players like Amazon, warehouse clubs, mass merchants, and other specialty retailers.

 

We anticipate that consumers will continue to gravitate toward price leaders in the retail category, resulting in industry consolidation and share gains for players that can pass along cost advantages to consumers in the form of low prices. While we believe Bed Bath & Beyond generally compares well with online players and other mass merchants from a pricing perspective, we have concerns that weaker home furnishing, department-store, and specialty retail rivals could be forced into competitive pricing strategies to stimulate traffic, which may change the economics across the entire home furnishing retail category and dilute company profitability. We believe Bed Bath & Beyond (and its secondary concepts) will remain relevant online shopping destinations, but a shakeout among traditional merchants could force suppliers to increasingly take their products directly to consumers. In our view, this could neutralize many of Bed Bath & Beyond's brand, merchandising, and supply-chain advantages.

 

Valuation 04/06/2017

We are maintaining our fair value estimate of $64 share after updating our 2017 outlook to include declining operating margin performance as customer acquisition costs and payroll expenses are set to remain inflated. We have ticked our full-year 2017 operating margin forecast down to 8.6% from about 9.8%. Our fair value estimate implies a 2017 price/earnings ratio of 14 times, an enterprise value/EBITDA multiple of 7 times, and a free cash flow yield of 6%. This is versus a five-year historical P/E based on our fair value estimate of 12 times, an EV/EBITDA multiple of 7 times, and a free cash flow yield of 8%. We expect the business to continue benefiting from rising housing market prices and stable turnover, but increased competition from online and mass merchant retailers will remain a headwind. We project that total sales can grow at a very low-single-digit pace over the medium term, supported by low-single-digit same-store sales growth (just over 1% on average), unit location growth of about 20 stores per year (mostly in buybuy Baby and Cost Plus World Market stores, as well as some international expansion), and increased omnichannel offerings such as buy online/pick up in store. We forecast improved gross margins over the next few years (but deleveraging 20 basis points in 2017) through the aforementioned omnichannel strategies, improved technology (leading to better merchandising), and an increased proportion of private-label and proprietary merchandise. We forecast gross margins that rise 50 basis points over our explicit forecast (from 2016 levels of 37.5%), despite the company's investments as couponing and incentives (free shipping) persist. We believe selling, general, and administrative expenses will deleverage slightly (60 basis points, to 28%) over the next decade as supply-chain and distribution efficiencies for newer concepts are eventually offset by diminishing top-line growth projections. Ultimately, this generates operating margins that normalize just below 10% in our base assumptions. Bed Bath & Beyond has historically generated returns on invested capital above our weighted average cost of capital assumption (8.3%), and due to the limited need for capital in retailing, we would be surprised if average ROICs fell below our WACC estimate in the near term. Even in a more competitive retail environment, we expect the company to be able to achieve low-double-digit ROICs.

 

Risk 04/06/2017

In our view, the most significant risk facing the company is competition from online players like Amazon and other mass merchants, which have passed their scale and other cost advantages into lower prices for consumers, particularly in commodified categories. While Bed Bath & Beyond's fundamentals are attached to the performance of the domestic home improvement market and other macroeconomic factors (which can influence life events like marriages and births), we think sales from other parts of the business (like buybuy Baby and Harmon Face Values) and international expansion will help to insulate the firm from material fluctuations in the revenue base. Another risk, in our opinion, is a slowdown in the cadence of improvement in the real estate market, which could be indicated by increased home inventories for sale or slower growth in new- or used-home prices, influencing the wealth effect on consumers, and cause them to spend less on replacing goods in their homes.

 

Although new competitors could feasibly set up shop in Bed Bath & Beyond's territory, we think a new player in the industry would be hard-pressed to replicate the vast vendor relationships that the firm has built over the past 40 years, particularly starting from a significantly smaller store base. Ultimately, the biggest brands in home furnishings will still want to partner with the biggest distributors, leaving a new competitor in a precarious position to acquire the appropriate inventory. Internationally, the company risks marketing improperly to audiences in Mexico and Canada, which could have significantly different consumption preferences than Americans.

 

Management 09/22/2016

We've assigned Bed Bath & Beyond a Standard stewardship rating. In general, we consider management to be excellent operators with a strong history of balancing rapid growth and profitability. Cofounders Warren Eisenberg and Leonard Feinstein are still involved with the day-to-day operations as cochairmen. CEO Steven Temares has been with the company since 1992. There has been very little management turnover, as senior executives average more than 20 years with the firm. Cash compensation for executives is relatively low, but equity-based compensation is a bit excessive compared with the peer group. Recent changes to tie compensation more closely to performance are positive. The board consists of Eisenberg, Feinstein, Temares, and seven outside directors, so there appears to be sufficient independence. Eisenberg and Feinstein owned 1.3% and 1.2% of the common shares, respectively, as of May. We believe the board and executive officers' ownership stake--around 5% of the outstanding shares--is sufficient to align their interests with common shareholders. However, the top four outside shareholders own nearly 28% of total shares outstanding, which could make change more difficult for outsiders. We disapprove of certain change-of-control payouts and a few related-party transactions (buybuy Baby was purchased from Feinstein's sons), but we generally find Bed Bath & Beyond's stewardship practices to be fair for minority shareholders.

 

[DTEJD1997]

Hey all:

 

Anybody else looking at BBBY?  Especially after earnings today?  The stock was at a 52 week low and after hours it is down another 19%!

 

After revised guidance, the forward P/E looks to be about 7?

 

Dividend yield about 3%?

 

Might be a speculative buy?

[ebdem]

Not looking at it. But maybe you like that debate: https://forums.theinvestorspodcast.com/discussion/2718/bed-bath-and-beyond/p5

[KJP]

Hey all:

 

Anybody else looking at BBBY?  Especially after earnings today?  The stock was at a 52 week low and after hours it is down another 19%!

 

After revised guidance, the forward P/E looks to be about 7?

 

Dividend yield about 3%?

 

Might be a speculative buy?

 

I looked briefly and passed because I couldn't say whether the current market cap is 7x 2019 earnings or 17x 2019 earnings.   

[SafetyinNumbers]

I thought it was interesting that the current $1.6bn left on the buyback is about half the aftermarket market cap!

[Guest MikeTheCannon]

This just keeps getting cheaper and cheaper yet I can't figure out why. Does anyone have any insight as to why this isn't a good buy sub-$20?

[KJP]

This just keeps getting cheaper and cheaper yet I can't figure out why. Does anyone have any insight as to why this isn't a good buy sub-$20?

 

The declining gross margins have been mentioned earlier in the thread.  They've dropped ~500 bps since the fiscal year ended February 2012, but (going on memory) they're still much higher than Wayfair (and probably Amazon).  So, when and at what level does the gross margin decline stop?  Put another way, what does this business look like in 2021?

[villainx]

I sort of don't understand BBBY overall strategy in that BBBY is hardly ever in any search results.  If I search for vacuum or stroller (for buy buy baby).  It seems like they purposely avoid online, when ... if you think of their mix of products, seem ideal for competing against Amazon.

 

 

[DTEJD1997]

Hey all:

 

Surprised this thread has not been updated.

 

BBBY reported pretty good sales & earnings for the latest quarter, beating estimates.

 

HOWEVER, the stock is down BIGLY.  I believe it has hit a multi-year low of $17.25/share.

BBBY was down on a week outlook AND investors are worried that management is mentally defective after hearing them speak on the conference call.

 

Managements revised (much revised) guidance for the upcoming 12 months is earnings of $2 to maybe $2.50?

 

BBBY is certainly a "cheap" stock IF this is the low OR pretty close to it.  A lot of investors think that management has no clue and eventually they will stop making $ and start losing it...

 

I would tend to give management a little credit...I mean they actually managed to build a profitable, multibillion $ company.

 

HOWEVER, it does not seem like management has a good grasp of the situation and are not getting AHEAD of their problems.

 

Any thoughts?

[KJP]

Hey all:

 

Surprised this thread has not been updated.

 

BBBY reported pretty good sales & earnings for the latest quarter, beating estimates.

 

HOWEVER, the stock is down BIGLY.  I believe it has hit a multi-year low of $17.25/share.

BBBY was down on a week outlook AND investors are worried that management is mentally defective after hearing them speak on the conference call.

 

Managements revised (much revised) guidance for the upcoming 12 months is earnings of $2 to maybe $2.50?

 

BBBY is certainly a "cheap" stock IF this is the low OR pretty close to it.  A lot of investors think that management has no clue and eventually they will stop making $ and start losing it...

 

I would tend to give management a little credit...I mean they actually managed to build a profitable, multibillion $ company.

 

HOWEVER, it does not seem like management has a good grasp of the situation and are not getting AHEAD of their problems.

 

Any thoughts?

 

On a quick look, I see more of the same -- declining gross margins and increasing SGA as a percentage of sales leading to a continuing massive squeeze on operating margins, which have fallen from 16.5% in 2011 to 6.2% last year. 

 

Are their gross margins still higher than competitors?  If so, why will those trends stop?  Put another way, what does this business look like in 2022?

 

[CorpRaider]

Thanks for sharing thoughts, I was/am planning to do a post on it.  How do you like "Bed, Bath & an Abomination?"  ;D

 

I am probably going to focus more on the impact on retail landlords.  They were down BIGLY too on the news (ok maybe 2% versus 20%, but still...it left a mark).

 

I mean they are just investing a ton (supposedly) in modernizing the experience/omnichannel.  I went to a store like a month ago, however, and it was just like 1998 in there.  They did take on the World Market chain AND I think babies r us going extinct will help them.

 

P.S.

 

Did the post.  I listened to the call, and it seemed like people were hammering them for not knowing when the investments will tail off, but I think one could argue anything else would just be typical management bs.  They apparently are trying out like a prime membership type service, I personally really doubt that will catch on in a narrow focused retailer (or even a broader one....Shop Your Way, anyone?).  Seems mgmt was maintaining healthy skepticism about that program though.

 

They confirmed that death of babies r us will help them materially but it will take a while for liquidated inventory to clear.  Said they intentionally have about 25% of their entire store fleet with leases to expire over the next two years....