The month of August was a good one for Bed Bath & Beyond (NASDAQ:BBBY). Its same-store sales increased 8%, several analysts upgraded its stock and the share price managed to lose less than 3% in a terrible month that saw the S&P 500 drop more than 5%. Everything seems to be going right for the home furnishings chain, and its stock price reflects this. While I can’t tell you how long this euphoria will last, I can tell you some of the reasons why it probably won’t.Online Sales
This is my biggest argument against Bed Bath & Beyond. In 2010, its revenues were $8.8 billion, yet its online sales totaled just $88.7 million and grew by only 3%. Those transactions represent just 1% of revenues. Whoever’s in charge of their e-commerce either needs replacing or given a good pep talk. These numbers are truly embarrassing.
Restoration Hardware, which filed a registration statement with the SEC on Sept. 9 and is a direct competitor of Bed Bath & Beyond, did $161 million in online sales in 2010 on $773 million in revenue. That’s 21% of the total and double its much larger rival. For those who don’t remember, Restoration Hardware was taken private for $232 million in June 2008. At the time, it was struggling financially and only now is coming out of its tailspin. Yet it’s able to generate a greater return from its websites.
Bed Bath & Beyond is leaving significant profits on the table. Williams-Sonoma (NYSE:WSM) generates approximately 42% of its revenue online with operating margins three times those of its retail stores. Bed Bath & Beyond’s operating margins are the same as those of Williams-Sonoma, meaning it’s doing a good job delivering store-level profits. If its e-commerce revenues had grown to 25% of its overall total, in 2010 alone it would have generated an additional $100 million in operating profits. Unfortunately, it’s so far behind most other large retailers, it’s hard to imagine it seriously competing in e-commerce without a complete change in business strategy. And that’s not happening.Share Repurchases
Bed Bath & Beyond loves buying back stock. In the past five years, it has used 75% of its $2.5 billion in free cash flow to repurchase 48.4 million of its shares at an average price of $51.65. Based on its Sept. 13 price of $59.21, its annualized return on investment is 2.5%. That’s not much for several billion dollars in shareholder funds. Perhaps the company could have taken $250 million of that sum and allocated it to the improvement of its e-commerce program. The company would be far better off.
In addition, because it has no debt and funds store openings through cash flow, it seems odd that it doesn’t pay a dividend. Evidence suggests that companies with higher dividend payout ratios experience faster earnings growth than those making lower payouts or, in the case of Bed Bath & Beyond, none at all. With annual free cash flow likely to hit $1 billion by 2013 and its stock riding high, regular or at least special dividends are a more suitable way to allocate capital while rewarding shareholders. Especially when all you can do is 2.5% a year.Stock Price
This is where I’ll get the biggest rebuttal from existing shareholders. After all, Bed Bath & Beyond’s stock is less than 5% away from an all-time high of $60.55, which it hit at the beginning of July. It has returned 9.3% annually during the past decade compared to 2.7% for the S&P 500. There’s nothing wrong with this kind of performance.
However, we all know that what goes up must come down. Reverting to the mean is such a killjoy, but let’s face it, the company is in the third year of a very good run. With the stock up 20.5% year-to-date when the markets are taking a pummeling, it’s not a matter of if the stock will lose some of its value, but when. If you compare specialty retail’s performance the past few years with Bed Bath & Beyond, the conclusion you’ll come to is that with the exception of 2008’s recession year, when the industry as a whole fared much worse, specialty retail handily outperformed Bed Bath & Beyond.Bottom Line
All good things must end. Bed Bath & Beyond might not drop like a stone, but I definitely see a slowdown in its appreciation.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.
Markets are closed on certain holidays. Stock Market Holiday List
By accessing this page, you agree to the following
Press Release Service provided by PRConnect.
Stock quotes supplied by Telekurs USA
Postage Rates Bots go here