Thursday, 25 June 2015

Bed Bath & Beyond: back at that US$70 level so time to buy?

I have written before about the US retailer Bed Bath & Beyond (link here) noting in my conclusion that:

'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'.

Well guess what?  Here we are...

Bed Bath & Beyond reported after the close yesterday and the general tone of their comments were not stunning with Seeking Alpha noting the company reported: 

'comparable-store sales gained 2.2% in FQ1. The comp was clipped 30 bps by an unfavorable swing in the Canadian dollar.Operating profit fell during the quarter on higher SG&A expenses.The company says its modeling for a consistent 2% to 3% rise comparable-store sales for the fiscal year'

The company is still feeling optimistic noting that 'overall it was a good start to the fiscal year as we continue to strive to do more for and with our customers wherever, whenever and however they express their life interests and travel through their various life stages. At the same time, we continue to make the necessary investments to thrive in an ever evolving retail environment'. Nevertheless the net income decline at -15% year-on-year is the worst since the dark days of 2008 not helped by higher SG&A and lower gross margins.  Nice chart on the latter here: 

Of course there are some growth areas with 'websites and mobile applications grew in excess of 35% while comparable sales consummated in stores were relatively flat'.  There are still physical store growth opportunities (Brooklyn and Mexico mentioned specifically) plus the company has continued to buy shares back at an average price of around US$72.6 i.e. a slight premium to the current share price: 

'During the first quarter of fiscal 2015, the Company repurchased approximately $385 million of its common stock, representing approximately 5.3 million shares.  As of May 30, 2015, the remaining balance of the existing $2.0 billion share repurchase program was approximately $499 million'.

I noted at the above-mentioned link that: 

'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'

How do these statistics look today?  Well there has been a deterioration in both metrics with the prospective EV/ebit ratio in the x11s whilst total return to shareholders (including buybacks) is still double digit.  

Nevertheless this buyback program is coming to an end and even though the company retains a strong balance sheet they have complicated matters with the addition of debt to the balance sheet.  

Pulling it all together I guess I am not getting that warm feeling - certainly not compared to the below US$55 share price I bought in at (and made a successful trade in) a year odd ago after writing the stock up here.  

The stock is opening up in the US$67s.  I think for me to buy given the range of other opportunities out there it needs to be a bit nearer the US$55 level I bought in at a year ago. 

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