By Ryan Fuhrmann, CFA
Bed Bath & Beyond(Nasdaq: BBBY) appears to be a growing company stuck in no-man’s land between the value and growth realms. But with last Wednesday’s stellar earnings report pushing the stock up by almost 7%, investors are uneasy about how long the company can continue to grow at its current rapid pace. Despite the stock’s recent price run-up, though, I think the company remains an interesting investment idea for those who like growth at a reasonable price.
Revenue for the quarter increased 14.8%, while same-store comps increased 6.3%. For the year, revenue and comps grew an equally impressive 13% and 4.6%, respectively. Earnings, meanwhile, climbed 13.6% for the quarter and 16.4% for the year. According to the earnings announcement, results included a stock-based compensation expense. To top it all off, management announced that it is mostly through with a $600 million share-repurchase program and increased guidance for fiscal 2006 to $2.17 per share in earnings or a forward P/E of about 19.
Bed Bath & Beyond has a number of investment merits, including no long-term debt and nearly $650 million in cash. What’s more, cash flow from operations (CFFO) is greater than earnings per share — for the current year, CFFO was 115% of net income. Free cash flow (FCF) is also strong; subtracting $220 million in capital expenditures from CFFO leads to about $440 million in FCF for the year, or about $1.50 per diluted share. The free cash flow yield (FCF divided by the current stock price) currently stands at about 3.7% — not overly high, but quite impressive considering the robust growth being reported. Return on capital is also impressive at about 20%.
How much longer can Bed Bath & Beyond reasonably be expected to turn in sales and earnings at a double-digit clip? The company has 746 namesake stores in 46 states, plus close to 30 Christmas Tree Shops and about 40 Harmon Stores, but management believes that it can operate at least 1,300 stores nationwide before saturation is even a concern. The company’s historical track record is indeed stellar; it has posted increasing earnings ever since its IPO in 1992, mostly at a 20%-30% annual clip. It appears there is little to stand in the way of another five to 10 years of double-digit growth, especially in the very large, $100 billion home-goods market in which the company competes.
Competitors include Linens ‘n Things(NYSE: LIN), Pier 1 Imports(NYSE: PIR), and Cost Plus(Nasdaq: CPWM). None of these companies represents formidable competition right now, though, since they all have their share of company-specific issues to work through.
Growth is clearly not as robust for Bed Bath & Beyond as when it was a younger company, but it appears that store expansion can continue unabated for quite some time. In my experience, investors have a habit of underestimating the extent to which a great retail concept can grow. This may be one of those cases, especially given the historical track record and the strong financial profile. On this one, I’ll go with Fool co-founder Tom Gardner, who picked Bed Bath & Beyond for the March edition of Motley Fool Stock Advisor.
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