Specialty home furnishings retailer Bed Bath & Beyond (Nasdaq:BBBY) continues to post stellar results since the demise of an arch rival and a small revival in the U.S. economy. Its fourth quarter results came in above market expectations and sent the stock soaring. Unfortunately, at the current valuation, future returns may not be as high for shareholders.
Fourth Quarter Recap
Net sales improved a very healthy 11.6% to $2.5 billion as same-store sales jumped 8.5% and the company opened six namesake Bed Bath stores, five buybuy BABY locations and a single Harmon Face Values store. Slower sales costs helped gross margins jump 12.7% to $1.1 billion while management held SG&A growth in check at 5.2%, both of which allowed for sales leverage and pushed operating profit up 24.4% to $462.1 million. Net income increased 25.4% to $283.5 million while share buybacks helped earnings jump 30.2% to $1.12 per diluted share. The bottom line came in ahead of analyst projections.
Full Year Review
Sales jumped 11.9% to $8.8 billion on a comparable sales increase of 7.8% and new store openings. Cost of sales again lagged the sales growth, rising 11.1% to push gross profits ahead 12.9% to $3.6 billion. SG&A grew only 4.8% to help operating income jump 31.4% to $1.3 billion. Net income jumped 31.9% to $791.3 million and share repurchases again helped further boost per-share results as earnings rose 33.5% to $3.07 per diluted share.
For the coming year, analysts currently project sales growth just over 7% and total sales to reach $9.3 billion. The current earnings consensus figure is $3.33 per share. Management expects full-year earnings growth between 10% and 15%.
Management exaplained that it currently operates 1,141 stores, 984 of which are the namesake stores. It sees the potential for 1,300 namesake stores and there is considerable expansion potential for the smaller concepts, especially buybuy BABY, as Babies “R” Us is the only other pure-play rival out there and operates 866 stores in the U.S., many of which share space with Toys “R” Us.
At the current share price, Bed Bath trades at a forward P/E of about 16.4. The trailing free cash flow multiple is slightly higher at 17.5. The demise of Linens N’ Things has boosted near-term sales and profit growth, as has an improving economy.
The company’s goal is to gain market share at the expense of department-store rivals such as Macy’s (NYSE:M) and specialty retail competitors that include Williams-Sonoma (NYSE:WSM), Pier 1 Imports (NYSE:PIR) and even mass chains such as Wal-Mart (NYSE:WMT). But given the maturity of its namesake stores and still small impact of its newer chains, it’s hard to see sales growing as rapidly going forward. Cash flow growth has yet to take off as well, both of which make the earnings valuation seem a bit rich. (For related reading, see The 4 R’s Of Investing In Retail.)