Fresh from the sleepy world of domestic merchandising and home furnishings comes
a stock with thrilling financials and encouraging long-term potential. Founded
in 1971, Bed Bath & Beyond (Nasdaq: BBBY) is the dominant American
retailer of low priced, but high quality household staples — everything from
bedspreads to bathroom rugs, and humidifiers to hair dryers. From a leadership
standpoint, co-founders (and co-chairmen) Leonard Feinstein and Warren Eisenberg
sit at the helm of an executive team that has realized 16% compounded revenues
annually since 2001 and prompted net income growth at an astounding 26%
annually. This is a management group aligned for success.
The team recently had to address issues of executive stock options compensation,
which has been popularized by scandals at places like CNET (Nasdaq: CNET)
and other big names. While insider ownership of stock options can lead to some
complex issues for a company, Bed Bath & Beyond’s management addressed the
situation promptly and satisfactorily. The company will continue to maintain its
impressive tradition of resolute leadership, and I don’t expect to hear any more
about it.
The company prides itself on offering a wider and deeper range of home
merchandise than any other retailer, which, together with selling quality goods
at low prices, gives it a strong position in the market. Nearly all of the
company’s 4,300 suppliers are located in the United States, so many items are
shipped directly to the stores. No single supplier has more than 4% of Bed Bath
& Beyond’s business, and the top 10 suppliers total just 18% of its business.
Overall, the company’s financials are extraordinary. Sales growth has
consistently been in the double digits, with same-store sales steadily moving
up. Earnings growth is traditionally above 15%, setting the stage for Bed Bath &
Beyond to continue beating estimates. In the past year, the company initiated a
$600 million share buyback program, maintaining its efforts to curb dilution.
This is a move all Fools should applaud. It’s representative of management’s
confidence in its own business. Furthermore, the company has more than $800
million in cash and no debt — especially impressive since it’s pursuing an
aggressive expansion plan. Every important financial metric shows consistent and
substantial growth for years. With plans in place to scale from 725 stores in
the beginning of 2006 to 820 stores by the end of February 2007 — and estimates
of nationwide saturation at about 1,300 stores — Bed Bath & Beyond has plenty of
room to grow.
So what can we expect from a stock trading at about $38? I believe it will
increase 19% to 23% annually over the next five years, boosting the company’s
valuation from around $10.75 billion today to $25 to $30 billion by the close of
2011. At that point, I expect the stock to trade at about $90 a share. The wise
investor who gets in now will realize a more-than-satisfactory 19% annualized
gain for the next five years.
I also am encouraged by the fact that Bed Bath & Beyond has consistently posted
the highest returns on assets (16%) and equity (23%) in the home furnishings
industry.
No one can talk about the retail industry without mentioning heavyweights like
Wal-Mart (NYST: WMT) and Target (NYSE: TGT). But, given their
nature as discount retailers, I’ll take my chances with Bed Bath & Beyond, a
company with a penchant for disciplined expansion and prudent spending habits.
Analyst consensus regarding stores like this is that they are directly
correlated with the housing market. If it’s true, then I believe investors will
see even better chances to buy shares of this long-term opportunity at cheaper
prices.
So where do I ultimately stand? Bed Bath & Beyond is one of a handful of
retailers with staying power. This has been an extremely well-run company for
some 35 years, and history shows that companies run by their founders — and
featuring high insider ownership — deliver higher returns on capital than their
peers. I believe Bed Bath & Beyond will more than double over the next five
years, and I anticipate holding this recommendation well beyond that.
