Friday, 9 January 2015

Bed Bath & Beyond - when do you buy back in?

It was back in June that I noted about the US retailer Bed Bath & Beyond 'on balance I can make this risk-reward work. I have bought some shares today in the US$55s looking for a bounceback into the US$70s. My eyes are wide open though'.  

The trade worked well and I did close it in late November at a price in the mid-US$70s.  

So why am I thinking about the company again today?  Well numbers after the close Thursday were not great: 
  • comparable store sales rose 1.7% Y/Y in FQ3, a slowdown from FQ2's 3.4%.
  • The retailer continues to expect FQ4 EPS of $1.78-$1.83, in-line with a $1.80 consensus.
  • FQ3 gross margin fell 80 bps Y/Y to 38.4%. SG&A spend rose 4% to $776.3M, slightly outpacing revenue growth of 3%.
As I write the shares are back to the lower mid-US$70s down around 7% on the day. So any leading thoughts on what to do from a 'no position currently' perspective?

The above headline numbers were not dire but many of the themes apparent in my original note(s) of a company in transition towards a great online presence...

'Today we have more than 200,000 unique SKUs available online across our websites representing an increase of more than 40% since last January. Many of these new SKUs can be shipped to our customers directly from our vendors'

...and hence a need to continue thinking pro-actively about their core physical retail division: 

'We continue to actively manage our real estate portfolio in a manner that permits store sizes, layouts, locations and offerings to evolve over time to optimize market profitability'.

Interesting too on inventories.  Up sequentially although apparently not a worry for the company:

'Retail inventories at cost were approximately $3 billion or $70.43 per square foot, an increase of approximately 5.3% on a per square foot basis over the end of last year’s third quarter. Retail inventories continued to be tailored to meet the anticipated demands of our customers and are in good condition'

Of course the main rationale for instigating the original position was the combination of a single digit EV/ebit ratio and a double digit free cash flow yield.  With the share price increase since June (even after today's fall) prospectively both financial metrics are in the 9s (x9x and 9%s respectively).  That is ok especially as the remaining share buyback proportion is equal to over 13% of the current market cap:

'The Company’s $2 billion share repurchase authorization had a remaining balance of approximately $1.8 billion at the end of the quarter and is expected to be completed during fiscal 2016'.

Clearly the story is not as compelling as it was at c. US$55 back in June but progress remains reasonable even if the inevitable scepticism about any 'big-box' retailer remains.  I think they are doing all the right things and at around US$70 I would consider buying back a position.  

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