Bed, Bath & Beyond: Letting Investors Rest Easy This home-furnishings retailer is bucking the sector's slumber and looks like it's going to stay wide awake
With the stock market still in bear country and the economy slowing, lackluster consumer
spending has given many retail shares a late winter chill. The Standard & Poors Retail index
has dropped almost 10% since Feb. 1, reflecting Wall Street fears that consumer pocketbooks
are slamming shut.
But smart investors might want to think twice about shying away from retailers altogether.
Some well-favored brands with less-cyclical growth trends and better-than-expected 2000
holiday sales stand to benefit from recent interest-rate cuts and Wall Street jitters.
Case in point: Home-furnishings vendor Bed, Bath & Beyond (BBBY
). Lower
mortgage rates are likely to fuel demand for new housing and home-remodeling loans, which
could drive more traffic to home-furnishing shops. Those factors, combined with BBB's
reputation for stellar earnings and steady growth, have spurred the company's share price to
climb 63% over the past year. The stock is now trading at around $23.30, down from its 52-week
high of $29 and change, but well up from its 52-week low of $14.31.
MEETS OR BEATS. Analysts say the company has superior product selection and
store layouts that will continue to translate into solid sales growth. BBB reports its
fourth-quarter and yearend earnings for 2000 on Apr. 4, and there's no reason to believe it
won't at least meet First Call analyst consensus estimates of 21 cents per share for the
quarter and 58 cents for the year. Those tallies would handily beat last year's earnings for
the same periods of 17 cents and 46 cents, respectively. The upscale, "big-box" retailer has
been meating or beating projections in each of the 33 quarters in its public life.
Meanwhile, BBB's numbers have held up well against some heavy competitors. According to Lehman
Brothers retail analyst Alan Rifkin, BBB has been outperforming perennial powerhouses Wal-Mart
and Home Depot. "They are the only company I haven't lowered estimates on," he observes. Also,
it's pushing forward with big expansion plans when others, such as Home Depot, are paring
back. BBB President Steven Temares hopes to add 80 new stores this year to its 312 existing
outlets. Temares claims the company has identified 350 more locations for possible new stores.
BBB store sales are growing at a rate of 3% to 5% annually, and its expansion plans should
account for an additional 25% increase in yearly sales revenues. "The goal is to continue
growing at 25% annually," says Temares. For its most recent quarter, ended in November, BBB
reported 25% top-line growth and a 4% surge in same-store sales. And gross margins of 40% are
extremely high for the retail industry. These numbers may be why analysts have put consensus
earnings for next year at 72 cents a share, a 29% jump.
NEAR THE CEILING? Alas, even if the company meets these high estimates, the
stock's upside is no longer as "up" as it was for investors who bought in around $11 per share
last summer. In fact, some analysts say it's too expensive and should probably trade in the
low $20s until consumer spending picks up again. Prudential Securities analyst Amy Ryan
downgraded the stock at the beginning of February to hold from strong buy, saying its current
share price is close to reaching its ceiling.
BBB's price-to-earnings ratio of 43 is lofty by retail standards. And its own top executives
might have tipped their hand to that fact when they dumped 1 million shares in February out of
285 million outstanding. Ryan isn't alone in saying the company's stock might need a rest.
Bear Stearns analyst Dana Telsey has a 12-month price target of $27, which leaves little room
for growth in coming months.
But the company, arguably the most stalwart retail investment around, still has room to grow
and remains a solid long-term holding. "Clearly, people want to buy this stock because of the
company's track record," says Wedbush Morgan Securities Vice-President Joan Bogucki-Storms.
"Bed, Bath & Beyond is still a core holding in the sector, and I only expect its value to
appreciate."
Even if the stock has little chance of repeating its double-time performance over the past
year, BBB looks set to continue to deliver results above market averages. And that's something
to make even the most insomniac investor rest a little easier.
Eads covers retailing, via both bricks and clicks, for BusinessWeek Online in New York
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