|Shares Out. (in M):||143||P/E||7.5||8.25|
|Market Cap (in $M):||3,283||P/FCF||12.8||8.7|
|Net Debt (in $M):||929||EBIT||0||0|
Is there a Beyond for Bed, Bath and Beyond?
Shares of Bed, Bath and Beyond, the great big box growth retailer of the 90s are decidedly out of favor as the company's profitability has disappointed and then disappointed again.
Just a couple weeks ago, BBBY slashed its estimate of earnings for fiscal 2017 from $4 and something to about $3 without something. The exact details got lost in the howling of shareholders who experienced a 15% gap down.
But for the record, (per Goldman) BBBY reported 2Q17 adjusted EPS of $0.67, well below $1.11 a year ago. Excluding an $0.08 hit from restructuring charges, EPS of $0.75 still tracked well below consensus (Thomson Reuters) expectations of 0.95. Reported EPS also embedded a $0.02 hit from the impact of Hurricanes Harvey/Irma and a $0.01 hit from the adoption of the share-based payment accounting standard. Total sales tracked below forecasts as SSS of -2.6% missed consensus expectations of -0.6%.
Further analysis by Goldman Sachs shows that Bed, Bath, and Beyond continues to lose market share, and at an accelerating rate. Additionally, they point out that recent commentary from home furnishings peers including W, HOME, WSM, and RH has been largely positive, suggesting that BBBY's issues are company-specific (i.e. format, pricing, and omnichannel investment).
So, why the interest?
Bed, Bath, and Beyond is a great company. It is well run, by professionals for shareholders. Since 2004 through the end of fiscal Q2 2017, the Company has repurchased approximately $10.4 billion of its common stock through share repurchase programs. Furthermore, the current remaining $1.6 billion authorization equals more than 50% of the current equity market capitalization.
Bed, Bath and Beyond’s fiscal house is in order. On August 26, 2017, BBY’s cash and investments totaled $563 million. Long term debt is a bit less than $1.5 billion. Net debt is a very manageable 1.1x EBITDA and Gross Debt about 1.85x. The stock may be in crisis but the company is not.
Bed, Bath, and Beyond’s valuation is attractive on an absolute level at around an enterprise value of 4.6x estimates for FY2018 EBITDA (which have been significantly reduced). The stock price and projections now clearly reflect the company’s issues.
Yet, the company still generates oodles of cash. On deeply cut 2018 numbers, BBBY equity generates an 8.8% free cash flow yield. The cash flow yield is ~12-13% on this year’s numbers and should the company ever reobtain some of its former glory, it’s a >20% free cash flow yield on last year’s numbers (which are sooo FY2016, by the way).
BBBY’s Enterprise Value at $4.2 billion is less than Sears Holdings at $4.5 billion (not including the pension). Which would you rather own? Even at the same price? Yes, BBBY sales are only $12.2 billion versus SHLD at $19.75 billion, but sales should be very similar for both in 2 years given SSS and store closures at SHLD. BBBY has only 1 turn of net debt, generates several hundred of million dollars of free cash flow (from operations) each year, and its on-line business is growing rapidly.
Bed, Bath, and Beyond has merchandising capabilities and powerful brands which have a future on-line. BBBY has a meaningful on-line business which, while only “15% of annual sales”, is in the order of magnitude of $1.8 billion in revenues and is growing organically at “more than 20%.” Our guess is that this business is, currently, still, (wait for it) ... not profitable. Which means that you are getting it for free when you pay 4.5x EBITDA for the lousy brick and mortar retailer. What is this business worth? It is of similar size to Overstock but growing much faster (20% vs 10%). Overstock today has an enterprise value of $555 million but lacks Bed, Bath & Beyond’s growth, brand, and omni-channel capabilities. On the high end, Wayfair’s valuation at 1.6x sales would peg BBBY on-line’s value at $2.9 billion or 70% of BBBY’s enterprise value. Using 45% of Wayfair’s valuation to account for the differences in growth would imply 71% of sales, or $1.3 billion. Assuming the on-line effort is still not profitable, implies the current $21.50 stock price reflects a 3.1x EV/EBITDA for the aforementioned, brick and mortar retailer.
Furthermore, that brick and mortar retailer is not as bad as it seems (and the on-line business is not as good as it looks). BBBY’s IT systems still leave something to be desired (in this case data). Which means they cannot tell you where a transaction originated. They can only tell you where it was consummated. As such, if a customer buys a Keurig coffee brewer on-line and returns it to a store, the on-line business keeps the revenues in its related Same Store Sales figures and the physical retailer records a contra-revenue to its own Same-Store Sales numbers. On-line is about 15% of the whole shebang. If on-line returns to stores are 5-15% of on-line sales then the physical retailer SSS declines could be only -4% (5% returns) to -2% (15% returns) not -4.75%. That would help change the narrative, a bit. It is not obvious when/if the company will clear this up.
On-line Margins are lower. We know that. Amazon is lauded for it. Just bring more volume. I’ll have another sale and another sale, please. Given the rapid growth of on-line for BBBY, gross and EBIT margins naturally should be shrinking, even if the lousy legacy business held steady. Remember the old days when bears would cry, “but Amazxon’s SG&A is skyrocketing as they build their distribution system. It is unprofitable growth!”. Should BBBY be severely penalized for pursuing the same unprofitable growth? No, I say. BBBY just needs different shareholders or different disclosure (or both). This week they got some different shareholders….
If BBBY does not pursue that same unprofitable growth, now, then it will never achieve scale and retain relevance in the retail ether that is the future. Maybe, once/if management’s IT systems are better they could break it out?
Resumption in Growth should be in the cards given current trends.
Assuming B&M (Brick and mortar) SSS continue to decline at 5% for two more years and then continue to decline at -2.5%, On-line needs to grow 20% next year and can slow to 16% in 2019 and 2020 and we would see top line growth again for the whole company in 2021. More, optimistically If B&M stems its sales declines next year to only -2.5% and on-line continues its 20% growth, the company would grow SSS almost 1% in 2018.
You are getting paid to wait.
It is not a lot, but the 15c a quarter in dividend income equates to a 2.6% dividend yield. It is not nothing.
Cost initiatives could help.
BBBY has launched several initiatives drive efficiencies in its stores and fulfillment operations. BBBY expects these initiatives to generate $150 million in cost savings over several years. At 4.6x EBITDA this is worth about $5 per share.
What does the long-term model look like?
Gross Margins should continue to decline. On-line margins are lower, but as the company gains scale, it should eventually be able to leverage the investments it has and is currently making in IT and its distribution infrastructure, thereby reducing SG&A margin.
Unfortunately, all the stores are profitable. Management said on the Q2 call that all the stores are profitable. I was sorry to hear this. It means that company profitability cannot be improved simply by closing any unprofitable stores now or when their leases expire. Still, management continually evaluates the real estate and seems (based on commentary and tone) more inclined to aggressively manage the real estate going forward. But then again, it’s not so bad. ALL THE STORES ARE PROFITABLE!...
Two data points do not make a trend. In a former life, I was a management consultant at a major strategy consulting firm. We used to say that a consultant needed three data points to draw a line. A team leader needed only two. A partner only one. Well, after Q1 BBBY’s management team was reluctant to reduce their full year guidance based on a single data point. After, Q2’s data point they brought guidance for 2017 down hard. The question remains whether they are qualified to draw a line based on two data points.
Company believes they Will Turn BBBY around… From the Q2 earnings conference call Q&A:
Laura Allyson Champine Roe Equity Research, LLC
The first question is, more generally, why buy back stock at all right now, given the declines in net income and the lack of visibility in the trajectory of the business?
Steven H. Temares Bed Bath & Beyond Inc. – CEO & Director
Yes. Again, it's a great question, and again, I think that it's averaged in -- it is a board decision, it's averaged in. It's the last thing we do with the capital. And listen, the big picture is, is that we know our people here. We know the initiatives we're working on. We know our capabilities, and we know we're going to succeed. So that's how we feel. So again, to average in these things, it could be part of what's the thought process, but we understand the criticism, clearly. But again, just so you know, it's not keeping us from doing everything, and it's not putting us in a position that's -- will put us in a cash position less than the cash position that we were at the end of last year.
Trump and the Republicans to the Rescue
BBBY unlike many retail stocks where the charts show down and to the right is a significant tax payer. They 37-38% per year on what used to be $1 billion to $1.3 billion of pre-tax income. Even on $500-$600MM of pre-tax income which is more in-line with what the street is expecting the tax savings from a reduced 20-25% corporate tax rate would be a substantial $68 million to $108 million or 49c to 77c per share per year. Even at BBBY’s depressed 7x multiple this would be worth $3.50 to $5.50 per share (16-25%).
Private Equity to the rescue
BBBY presents a compelling opportunity for private equity at these prices. The currently under levered, highly cash generative business is cheap due to 1) share losses which may be reversible and 2) increased costs from investments in the business. Both a buyout shop and BBBY are likely to be well served to undergo this transition/transformation outside the spotlight of the public markets.
In summary, Bed, Bath and Beyond appears to be presenting an attractive entry point at $22.91 with long term shareholders poised to benefit from 1) capital return from dividends and share repurchases; 2) earnings growth as slashed numbers may prove to be too drastic as either current trends prove transitory, management can stabilize traffic trends, current high levels of investment wane, and the on-line business gains scale and is able to leverage SG&A; 3) multiple expansion as investors return to the name once the panic subsides.
Price target: 10-12x $4 of EPS or $40 to $48 per share
B&M retail share losses accelerate
On-line business growth slows materially
Cost initiatives fail or damage the business
General economic slowdown affects demand for household goods.
Potential Leveraged Buyout
Return to organic growth once revenue growth from on-line eclipses store revenue declination
Improved profitability from growth in on-line, improved productivity from investments
|Entry||10/07/2017 09:15 PM|
Well BBBY has multiple concepts. By concept I would say a substitute is available for most products sold at Bed, Bath, and Beyond (BB&B) which is the dominate concept. At Buy, Buy Baby (BBB) I would still say most. At Christmas Tree Shops/and That much less so (seem they plan to grow this concept). While you can find substitutes or identical matches at Amazon for most of the BB&B and BBB products you are going to have to go into the shopping process knowing what you want. BB&B curates an assortment of proprietary brands, exlcusive brands, as well as name brands. I would say who cares about the exclusive brands (i.e. Wamsutta, real simple, Ellen Degeneres, etc). Its more about what is not at BB&B than what is there.
BB&B's historical competitive advantage has been a deep curated assortment, of quality prioducts, at great prices, that was conveniently located and supported by great customer service. Today I would say the edges are the curated assortment, convenient locations and customer service. I do think those issues matter and will continue to matter for many retail customers. Amazon is a firehose. You need to know what you want. If you are headed back to school or just purchased a new home heading to BB&B and exploring the store to see all the types of products you might need and get them immediately is is not an easily replaced experience by Amazon. If you just had a child and are thinking about which stroller and want to see and feel them, BBB is a much better option. Sure you can abuse the system by window shopping at the stores and purchasing 10% cheaper at Amazon, but the return experience is not as convenient. If you know what you want and you just need a replacement, I agree Amazon is probaly fine and cheaper for many products and getting it tomorrow or the next day is good enough.
If you think Amazon will be the only retailer left standing then this idea is probably not for you. But I believe omnichannel and customer service will continue to have a significant place in the retail landscape. At the same time, BBBY's on-line business is growing at >20%, they are expanding in treasure hunt type concepts (with the growth of the And That concept), and they are expanding into furniture. 20 years from now when many of the people who do not know how to shop on-line are gone, BBBY's real estate footprint will look much different and the on-line business will be larger than the B&M (mostly from a growth in-line). And between now and then BB&B will have returned a lot of cash to shareholders (mostly through stock repurchase) and fully modernized their systems and harmonized their gross margins to the competitive landscape.
|Subject||question on write up|
|Entry||10/09/2017 11:11 AM|
what do you mean by? This week they got some different shareholders…
it's remarkable how the consensus eps is on this name. from 3.05 this year and then stepping down to 2.78, 2.63, 2.44 over the next 3 years after that.
it's unfortunate how much they spend on share buybacks over the year.
|Subject||Re: question on write up|
|Entry||10/09/2017 05:26 PM|
I actually wrote the draft for the writeup the week BBBY missed. I missed that sentance when I updated it before I submitted. So what I meant by "this week" was the turnover in the shareholder base on the volume pst earnings. In general, my point is that the shareholder base has been turning over and with the significant volume post earnings the shaeholder base is starting the process of shifting to investors who have full information about the challenges and the lowered guidance. I did not mean to imply that there are any activists, etc involved in the name. I do not know of any.
In terms of how much they have "wasted" on buybacks at higher levels given the NOW lower price, management actually addressed this on the call. The business cadence changed after April. In April (when they reported their Q1) they were on plan. The business deteriorated after that. Management indicated they believe their purchases will be profitable (if not obviously at the best price they could be). Their process, also, is set the buyback goals at the board meetings and execute a plan. I agree that being more opportunistic could add value, but they are not stock traders. In general, I prefer a buyback to a dividend, and hindsight is 20/20. I also do not think they conceived that there stock could trade here. What they have not done is lever up the company to buy back the stock at crazy levels ala RH. This management team is responsible, if a bit conservative.
|Subject||Re: Re: question on write up|
|Entry||10/09/2017 05:42 PM|
the shareholder base has been turning over the last 4 years as knife catchers throw in the towel and sell to the next batch of knife catchers. :-)
and i am talking about the stock buybacks over the last 3-5 years not just this most recent quarter. Ignore the stock price decline - but rather how much their business net margins have changed and how unprepared they were for this decline. The VIC write up on the short side from a few years ago basically nailed it.
They have generally been well regarded. i'd love to see at least someone step up and buy some shares. These guys have been selling shares all the way down while the company has been buying shares.
|Entry||10/31/2017 09:54 AM|
can you help pencil out how you get to $4 of earnings? Is this a combination of tax rate, IT spending decline and sales stabilization?
|Subject||Re: Re: $4 earnings|
|Entry||11/07/2017 11:13 AM|
at what point does management need to go here in your view? i know they have historically been considered great operators but they totally whiffed on the capital allocation and they missed the on-line threat and the gross margin distruction. CEO has sold what like 100mm of stock back to the company over the last 5 years.
i can't tie back to your 500 bps on gross margin comment, can you help me out. i am having a brain fart.
IT spending hopefully declines over time but i don't know what the right gross/net margin for this business now.
|Subject||Re: Re: Re: $4 earnings|
|Entry||11/07/2017 10:22 PM|
I guess I misspoke. Gross margin was 41.4% in 2011, it is expected to be 36.5% in 2017. So its 490 bps of margin contraction over 6 years, not 500 bps in five years. The point is the same.
Personally, I think someone should make a bid for this company and replace management at the close of the aquisition.
In response to your comment, "IT spending hopefully declines over time but i don't know what the right gross/net margin for this business now."...The same could be said for Amazon...The point I made in my write-up is if the on-line business was stand alone and growing 20% like it is but was not profitable, people would focus on the top line in that business as the signal of value. In a blended business like BBBY, the added costs are a liability driving down the stock price. Without that dynamic, BBBY would not be so interesting.
|Subject||Re: Re: Re: Re: $4 earnings|
|Entry||11/08/2017 10:34 AM|
re gross margin - after i wrote that i figured that you were including 2017 numbers.
i agree that management has screwed a few big things up. you figure with the 100mm the ceo has taken out of the company he can buy a token 100k share position for 2mm and show some confidence.
|Subject||The not-talked-about threat from off-price|
|Entry||11/08/2017 01:10 PM|
There seems to be a bigger threat than AMZN to full price retailers, and it's the off-price industry. TJX's HomeGoods division sells comparable goods to BBBY at 20%-60% discounts. The off-price industry has been gaining share from apparel retailers for some time, but this same dynamic has not been talked about in the home goods space. BBBY's CEO finally caved on the last call and admitted that off-price is seeing traffic growth while full price retailers like BBBY are seeing declining traffic.
HomeGoods currently has 620 stores in the U.S. and will expand to 1,000 stores. Moreover, TJX recently launched a second home concept called HomeSense. It is differentiated from HomeGoods and management will open HomeSense stores next to HomeGoods stores to incept consumers to shop both. HomeSense could ultimately have a market potential of 1,000 stores as well.
In the most recent Q, HomeGoods had +6% SSS while BBBY's SSS was -2.6%.
Macy's CFO shed some light on who is really eating her company's lunch at a conference in 2016:
"The bigger challenge for us has not been the Internet, it’s really been off-price. We’ve spent a lot of time trying to make our experience better vis-a-vis the off-price retailers because I think that’s been the bigger competitive threat for us over time."
– Karen Hoguet, Macy’s CFO, UBS Consumer & Retail Conference, March 2016
Macy's stock can't find a bottom even with an 8.5% dividend yield and a ton of real estate value. That's because the business is in secular decline.
BBBY, IMO, is a couple of steps behind M. It's SSS declines are not as bad as M (down MSD) yet. But, BBBY has more "sayonara risk" since it leases all of its real estate.
In the near term, the stock could bounce as the short position has increased substantially. If you look at a historical chart of the stock price vs. the short position, the shorts have tended to pile on near bottoms in the stock, only to get squeezed. From a technical point of view, the stock looks OK for a bounce, but the long-term business challenges may be insurmountable. I'm not sure I'd bet on a great management team facing the competitive threats that BBBY is facing (AMZN and 2 competing off-price concepts from TJX). But BBBY has a sub-par management team. A cheap valuation, on LTM numbers, is the entire root of the bull case, IMO. But I don't think LTM numbers or anything near them will be around going forward. IMO, BBBY and M are both melting ice cubes.
|Subject||Re: The not-talked-about threat from off-price|
|Entry||11/13/2017 11:14 PM|
BBBY's Christmas Tree Shop chain is being expanded as AndThat! as an off-price retailer that would compete with HomeGoods. Below are some comments from the Q3 call. Obviously they are way behind, but they are attempting to address it.
The evolution of Christmas Trees Shop has been ongoing for several years. We launched our first newly fixtured and merchandised andThat! store about 18 months ago in Kennesaw, Georgia, and 6 months later, we opened in Jacksonville, Florida. The evolution of the concept includes an enhanced mix of trend-right differentiated merchandise of better quality, design and value, in conjunction with an elevated treasure-hunt experience with more locally sourced product and enhanced fixtures, lighting and in-store visuals that create a fun and engaging shopping experience for the customer. We expect to open 3 new andThat! stores in a little more than a 2-month period. The first, which just opened, is in Woodland Park, New Jersey. Then, we'll open in Fairfax, Virginia, followed by Rehoboth Beach, Delaware. We're excited by the evolved model and believe it is poised for strong growth in the coming years.