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A Financial Analysis and Valuation of Bed Bath & Beyond
1 Harvard College Analyst Report | Bed Bath & Beyond
EXECUTIVE SUMMARY
Historical Performance
Our analysis of Bed Bath & Beyond (“BBBY”) revealed strong profitability for the firm
and its investors as well as consistent growth over our time period of study spanning FY
2000-10. As a company focused on selling consumer durables, BBBY was inevitably
affected by the decline in consumer spending during the recession, but managed to
weather the difficult conditions affecting the overall macroeconomic environment
relatively well compared to other retailers. Overall, BBBY’s stable cash flows, lack of
debt and other strong technical fundamentals made BBBY a very attractive company over
the past decade, as validated by the rapid growth in its stock price during this time.
Key Observations
The recession was the primary reason why BBBY’s profitability ratios such as ROA and
ROE decreased by 6% and 10%, respectively, in 2007 and 2008. Further decomposition
of these two ratios, however, provided insight that these decreases were not a result of
volatile changes in cost structure or turnover, but rather strategic manipulation by
management to lower profit margins and increase coupon redemption to boost sales.
Since 2008, the company’s profitability ratios have returned to pre-recession levels, and
we expect the company to post steady positive gains in the coming years.
BBBY’s capital structure is unusual in the sense that the company holds relatively little
debt, reflecting a business model that is financed nearly entirely by equity. Since 2008,
the company’s current ratio has steadily increased as a result of increases in cash, and
though nearly half of its current assets lie in inventory, BBBY’s deepened cash reserves
mitigate any possibility of short-term liquidity issues.
Our financial statement and valuation analysis also led us to look at BBBY’s cash
management. Using the residual income valuation method, we observed that without any
current changes to how management uses the company’s cash, BBBY’s cash reserves
would exceed $8bn by 2020, representing 68% of total assets. Therefore, BBBY can
either use cash to take on cheap debt (especially in the short term) or return cash to
investors in the form of a dividend or stock repurchase.
Findings and Conclusions
Our discounted cash flow model and relative valuation analysis value BBBY at $69.92
with benchmarks in-line with peer group industry averages. Our residual income
valuation model values the company at $55.88, suggesting that BBBY is overvalued
today at a share price of $69.41. Hence, we are likely to put a “Sell” rating on the stock,
though a “Hold” rating is also a viable option for the risk-averse investor.
A Financial Analysis and Valuation of Bed Bath & Beyond
2 Harvard College Analyst Report | Bed Bath & Beyond
COMPETITIVE AND ECONOMIC ENVIRONMENT
Description
Bed Bath & Beyond (BBBY) is a chain of retail stores located primarily in the United
States and Canada. The chain’s brands include Bed Bath & Beyond, Christmas Tree
Shops, Harmon and Harmon Face Values, and buybuy BABY. BBBY primarily sells
mid-ranged domestic merchandise and home furnishings. The Company currently has
1,139 stores in the United States, Puerto Rico, and Canada and has a current market
capitalization of $16.4bn.
Market Fundamentals
Source: U.S. Bureau of Economic Analysis
Source: The Federal Reserve Economic Database
The US furnishing and household
equipment market is very fragmented and
competitive. Indeed, there are many
different types of household goods that
can fall into this category, and many
retail stores address the various sub-
categories of this market. BBBY
competes with local, regional, and
national retailers that include specialty
retailers, department stores, discounters,
and online retailers. From Figure 1, the
market peaked at $271bn in 2007 but has
since contracted to $235bn in 2009. In
2010, consumer spending went up to
$244bn.
Despite this muted increase, consumer
sentiment remains relatively depressed,
as seen in Figure 2. With consumer
confidence remaining low in the wake of
the recent recession, it is difficult to
imagine a large upswing in consumer
spending occurring in the near future.
Since BBBY specializes in selling home
furnishings and domestic merchandise
it’s financial success is very closely
related to the housing market. The Wells
Fargo National House Market Index is a
measure of the number of sales sold each
month (seasonally adjusted).
0
50
100
150
200
250
300
Do
llars
Sp
en
t (i
n b
illio
ns)
Fiscal Year
Figure 1: Home Furnishings Consumer Spending
0
20
40
60
80
100
120
Figure 2: Consumer Sentiment
A Financial Analysis and Valuation of Bed Bath & Beyond
3 Harvard College Analyst Report | Bed Bath & Beyond
Figure 2 – Standard and Poor’s.
The Case-Shiller Home Price Index is a measure of the price of homes sold each month
(also seasonally adjusted). From Figure 3, the prices for homes appear to have retraced
greatly over the past five years, dropping more than 25% as measured by the Case-Shiller
index. Similarly, Figure 4 shows that home sales remain well below pre-recession values.
Yet, despite the depressed state of the U.S. housing market, BBBY has seen a continual
and strong increase in net sales. BBBY appears to remain on an upward trend even in the
wake of the recent recession. Despite this continued increase in net sales, however, the
potential for further decline or continued stagnation in the housing market remains a
nontrivial concern for BBBY.
Source: Wells Fargo
0
50
100
150
200
250
Ind
ex
Figure 4: Case-Shiller Home Price Index
0
10
20
30
40
50
60
70
80
Ind
ex
Figure 3: Wells Fargo National HMI
A Financial Analysis and Valuation of Bed Bath & Beyond
4 Harvard College Analyst Report | Bed Bath & Beyond
Short-term Challenges
The past few years have clearly presented an unfavorable economic climate for the home
furnishing retail industry. The collapse of the housing market and subsequent recession
has precipitated a decline in consumer spending, especially discretionary spending.
Nevertheless, BBBY has averaged a 5% increase in same store sales and increased its
number of stores fivefold over the past ten years. Moreover, in 2008, BBBY’s main
competitor, Linens ‘n Things, went bankrupt and was liquidated. This collapse of its
closest competitor has buoyed BBBY’s sales and performance at a time when the home
furnishing market has shrunken markedly. We are therefore unable to disentangle
BBBY’s strong performance during the recession from the concurrent collapse of its
nearest competitor, naturally begging the question of whether BBBY will be able to
maintain its recent growth.
Bed Bath & Beyond must
focus on increasing same store
sales. Much of the percent
increase in store sales has
come from the first few years
of a store’s opening while
older stores have reached a
plateau in sales. BBBY must
therefore reassess and retool its
growth strategy as market
penetration increases and new
store openings become less
likely. The focus should
instead be on improving same
store sales.
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Figure 5: End of Year Store Count
-4
-2
0
2
4
6
8
10
Pe
rce
nta
ge C
han
ge
Figure 6: Percent Change in Same Store Sales
A Financial Analysis and Valuation of Bed Bath & Beyond
5 Harvard College Analyst Report | Bed Bath & Beyond
Long-term Challenges
In the long-term, BBBY must focus on its market share and actively work to maintain its
positioning in the face of increasing Internet sales. In fact, for the past five years, there
has been double-digit growth in online retain sales, a trend which eMarketer expects to
continue in the near term. For instance, in the home furnishing online market, eMarketer
expects sales to have double-digit growth through 2016; in 2010, home furnishing online
sales were at $11.9bn and is expected to grow to $18.8bn by 2013 and $26.6bn by 2016.
To combat this new competition, BBBY will have to either bolster its online presence or
break into the international market. BBBY currently does not have the infrastructure to
handle a large increase in online sales.
Figure: 7: U.S. Online Retail Sales
Source: eMarketer
BBBY will have to reconsider its current operating model as its stores mature in their
local markets. As of FY2011, BBBY only operated three central distribution centers.
Most of its merchandise is on display at the sales floor at all times; the remaining stock is
stored in the back of the stores. Third-party vendors ship the vast majority of supplies to
the local stores because BBBY does not have the capacity to service itself. As an
expanding company, this strategy has allowed BBBY to strategically place stores in areas
without warehouses relatively quickly and to remain lean and flexible. However, as
BBBY grows larger, it must consider revamping this system in order to gain greater
bargaining power with its suppliers, provide consistent brands across stores, and maintain
more control over its distribution chain. Bed Bath & Beyond currently fails to take
advantage of the economies of scale that can come with the operations of a large retailer.
Furthermore, this current decentralized model prevents BBBY from being an effective
player in the online retail market.
A Financial Analysis and Valuation of Bed Bath & Beyond
6 Harvard College Analyst Report | Bed Bath & Beyond
COMPETITIVE FACTORS
Buyer Power
In today’s market, retail stores have increasingly less power relative to the consumer.
Consumers have local mom-and-pop shops, regional shops, and national shops from
which to purchase their furnishings. Even within the national shops, there are many
retailers who specialize in other wares, but inevitably sell similar goods. Finally,
consumers have with increasing frequency gone to the Internet to purchase their goods.
Many of today’s consumers do not care about the brand of the stores, but rather the
brands of the goods. Furthermore, eMarketer claims that 45.9% of shoppers have
researched a product in a store before purchasing it online. Thus, the buyer has gained a
significant advantage over the brick-and-mortar retailers.
Supplier Power
BBBY has marginal negotiating power with its suppliers. Although BBBY has developed
strong relationships with select suppliers, some of its suppliers are only regional. In
FY2010, BBBY had roughly 5500 suppliers, with the largest supplier accounting for less
than 5% of merchandise purchases. Each BBBY store (or group of BBBY stores)
purchases its own supplies and warehouses them individually. Despite its size, BBBY is
not one of the largest customers for many of its suppliers. It instead believes that this
method allows it to quickly switch from one supplier to another, as it does not highly
value brand. If BBBY becomes more centralized, it will have more bargaining power
with its suppliers becoming a more significant customer to many of its suppliers.
Threat of New Entrants
Retail shops are relatively easy to open; new entrants do not need much capital or
expertise. However, many local mom-and-pop shops do not survive in this saturated
environment because consumers prefer shopping at chain stores, where the quality of
service, expertise, and supply of goods is known. Because BBBY often deals with
suppliers on a regional basis, BBBY does not have a highly sophisticated and established
distribution chain that would give it a significant advantage over new entrants. Therefore,
BBBY only has its brand as a barrier to entry for new competitors. In the domestic
merchandise market, many national and regional retailers, who specialize in other
domestic goods, are encroaching on the BBBY’s established market. For big players with
established supply chains and the shelf space, selling home furnishings or domestic
merchandise is the next logical and easy step.
Threat of Substitutes
There is very little threat of substitute for the goods that BBBY sells; people will always
need their domestic merchandise. However, as mentioned in the “Buyer Power” section,
customers have many options for where they can shop. As a whole, brick-and-mortar
retailers are negatively impacted by the rise of the Internet and thus retailers will become
increasingly threatened, as online purchases become viable substitutes for actual store
visits.
A Financial Analysis and Valuation of Bed Bath & Beyond
7 Harvard College Analyst Report | Bed Bath & Beyond
Rivalry Among Existing Firms
Since the bankruptcy of Linens ‘n Things, Bed Bath & Beyond has had one big rival:
Williams-Sonoma. However, Kohl’s and Pier 1 Imports also compete in the same market.
Many of these companies are chasing stagnant or falling consumer dollars. In addition to
these close rivals, BBBY does face competition from retailers in adjacent markets such as
IKEA or Wal-Mart. Even though the retail market is highly competitive, BBBY has an
established brand that is well known for high quality customer service. As a national
brand, BBBY performs strongly in its saturated market. BBBY has gained market share
in the most recent years because of its customer service and diverse product offerings.
Strategy
BBBY has always had great customer service and therefore often outperforms other
brick-and-mortar retailers. The high quality of service allows it to differentiate itself from
its closest competitors. It advertises itself as a one-stop shop for all possible home needs.
A core strategy for the firm has been to offer more low margin items to increase customer
choice and sale value. In fact, BBBY reported lower gross margins but higher gross profit
growth these past few quarters because BBBY has recently begun pushing the
introduction of more coupons in order to attract customers. The increased merchandise
offering has driven sales productivity. 80-90% of BBBY’s inventory is out on the floor
for customers to view. The idea is that with “everyday low prices,” customers may find
goods that they “need” as they walk through the stores. In addition, BBBY wants to
present itself as a collection of specialty stores with related product lines grouped
together. This method allows a customer to focus his search for specific needs, yet
increases the chance that a customer finds related items to purchase.
In FY2010, BBBY opened many stores with its nimble distribution operations. The
depressed real estate prices allowed BBBY to open stores in previously expensive
locations. This strategy should continue through 2012. BBBY lists its expansion program
as one of its greatest successes; from FY1992 to FY2010, the company grew from 34 to
1139 stores. This expansion program includes a management structure that allows BBBY
to immediately place high quality managers in new locations. As the more obvious store
locations disappear, BBBY should begin to consider how to retool its strategy for future
growth in a method less dependent upon the opening of new stores to drive growth.
Return on Assets
We begin our analysis of Bed Bath and Beyond by assessing the profitability of the firm.
To do this, we consider the evaluation of several key ratios beginning with BBBY’s
Return on Assets (ROA) ratio. ROA measures the profitability of all capital invested in
the firm regardless of capital structure.
A Financial Analysis and Valuation of Bed Bath & Beyond
8 Harvard College Analyst Report | Bed Bath & Beyond
Source: Financial Reports
Figure 8 shows that BBBY’s ROA held relatively stable at the beginning of the decade
with an ROA of over 16%. Beginning in 2006, however, we notice a significant decline
in BBBY’s profitability. Because this is a company that specializes in affordable
domestic merchandise relative to higher-end competitors such as Crate and Barrel and
Williams Sonoma, we were not surprised that BBBY’s performance was greatly affected
by macroeconomic trends. Concurrent with the recent financial recession and collapse of
the housing market was a precipitous decline in BBBY’s ROA, dipping as low as ~11.0%
in 2008 before recovering after the recession to pre-FY 06 levels.
In the MD&A section of the company’s FY 2008 10-K, they note that: “The Company
believes factors such as the increase in the unemployment rate and issues specific to the
housing industry, including a decline in home values in conjunction with a downward
trend in home sales, have negatively impacted consumer confidence and the level of
discretionary spending by consumers, resulting in an adverse impact on the Company’s
net sales, net earnings and operating cash flows.” Though BBBY is a retail company that
relies on operating leases for its stores, operating leases accounted for just 7.8% of total
assets in FY 2010. For this reason, we have decided not to exclude operating leases in the
firm’s total asset calculation, as the effect of excluding operating leases would have had
little effect on BBBY’s profitability.
ROA Decomposition
We have broken down Return on Assets into two ratio components: Asset Turnover and
Profit Margin. Asset turnover measures the efficiency with which BBBY is using its
assets to generate sales, while the profit margin measures how much of every dollar in
sales BBBY actually keeps in earnings. As we have learned, the two ratios generally
move in opposite directions: companies with lower profit margins tend to have higher
0.0%
4.0%
8.0%
12.0%
16.0%
20.0% R
OA
Figure 8: BBBY's Return on Assets
A Financial Analysis and Valuation of Bed Bath & Beyond
9 Harvard College Analyst Report | Bed Bath & Beyond
asset turnover, while companies with higher profit margins tend to have lower asset
turnover.
Source: Financial Reports
Figure 9 shows some volatility in BBBY’s profit margins over the past ten years. Profit
margin trends follow ROA trends closely, suggesting that the decline in ROA during the
recession was due mainly to lowered profit margins rather than asset turnover. Even with
the volatility, BBBY’s profit margins hover around the high single-digits – a comfortable
position for a company with mid-price range market positioning in the industry. (For
comparison, higher-end competitors like Cost Plus and Pier 1 Imports post lower double-
digit profit margins.)
Profit Margin for ROA Analysis
From our decomposition, we observe that the profit margin rose steadily from 2000 to
2005, declined during the recession and then began rebounding in 2008. Figure 10,
however, shows us that the cost structure of the company in the last ten years has stayed
relatively constant despite changing business environments: COS, which includes Cost of
Goods Sold (COGS) and distribution costs, remained roughly constant as a percentage of
sales at 60%, whereas SG&A as a percentage of sales rested at approximately 30%.
Therefore, if COS and SG&A expenses are not accounting for the decrease in profit
margins from 2006 to 2008, we arrive at the conclusion that BBBY’s strategy was to
intentionally discount the price of its products – thereby lowering profit margins – to
keep sales afloat in the wake of tough macroeconomic conditions. This has been
accomplished through an increase in coupon redemptions and the shift in the mix of
merchandise sold to lower margin categories. As a result, though BBBY consistently
experienced double-digit growth in previous years, BBBY was able to capture year-over-
year sales growth of 6.5% and 2.2% in 2007 and 2008, respectively. We see then that our
0.00
0.50
1.00
1.50
2.00
2.50
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Ass
et
Turn
ove
r R
atio
Pro
fit
Mar
gin
s
Figure 9: BBBY's ROA Decomposition
Profit Margin Asset Turnover
A Financial Analysis and Valuation of Bed Bath & Beyond
10 Harvard College Analyst Report | Bed Bath & Beyond
fundamental ratio analysis validates the trends observed in the Competitive and
Economic Environment section of the report.
Source: Financial Reports
Asset Turnover Analysis
We observe from Figure 11 that inventory turnover stayed fairly constant from 2000 to
2010 but that PP&E turnover – also known as Fixed Asset turnover – decreased starting
from 2006 before returning to pre-recession levels after 2008. The fixed asset turnover
ratio measures a company’s ability to generate sales from PP&E investments. Thus, the
decline in PP&E turnover makes sense; as BBBY continued to make property and
equipment investments in 2006 and 2007 (25.8% and 20.7% growth, respectively), sales
slowed down considerably, thereby lowering asset turnover. However, PP&E consists of
just 20% of total assets, so the fluctuation in PP&E turnover did little to drastically affect
overall asset turnover.
Source: Financial Reports
0%
20%
40%
60%
80%
Pe
rce
nt
of
Sale
s
Figure 10: BBBY's Cost Structure Over Time
COGS/Sales SG&A/Sales
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8.00
10.00
Figure 11: BBBY's Asset Turnover Analysis
Inventory Turnover PP&E Turnover
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
BBBY's ROE
A Financial Analysis and Valuation of Bed Bath & Beyond
11 Harvard College Analyst Report | Bed Bath & Beyond
Return on Equity Analysis
Return on Equity (ROE)
measures a company’s
profitability by showing how
much profit a company generates
for invested shareholders. In the
case of BBBY, the company has
no debt and offers no preferred
stock; its only offering is
common equity. Since equity
makes up a larger percentage of
the right side of the balance
sheet, it therefore comes as no
surprise then that BBBY’s ROE
follows a similar trend to ROA,
as seen in Figure 12.
Source: Financial Reports
When we decompose ROE, we notice that asset turnover and the leverage ratio (which
we define here as assets divided by equity) hold steady throughout our time period of
analysis. The decline in BBBY’s ROE from FY2006-08 is attributed to a decline in profit
margins for the same reasons stated in our ROA analysis.
Source: Financial Reports
EARNINGS QUALITY AND ACCOUNTING ISSUES
A close examination of Bed Bath & Beyond’s past 10K reports revealed few red flags
and accounting concerns. BBBY’s disclosures in its past financial reports were
transparent and relatively consistent year over year. In the sections below, we present our
financial evaluation of BBBY’s earnings quality through an analysis of accruals, one-
time charges and an examination of BBBY’s footnotes. The findings suggest that Bed
0%
5%
10%
15%
20%
25%
30%
Re
turn
on
Eq
uit
y
Figure 12: BBBY's ROE
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1.50
2.00
2.50
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Turn
ove
r/Le
vera
ge R
atio
s
Pro
fit
Mar
gin
s
Figure 13: BBBY's ROE Decomposition
Profit Margin Asset Turnover Leverage Ratio
A Financial Analysis and Valuation of Bed Bath & Beyond
12 Harvard College Analyst Report | Bed Bath & Beyond
Bath & Beyond’s financial statements accurately depict the current financial state of the
firm.
Accruals
Calculating Bed Bath & Beyond’s historical accruals from 2006-2010 yielded no
significant red flags. BBBY’s total accruals (Net Income-Cash Flow from Operations)
were negative throughout the 5-year interval, confirming that BBBY’s cash flow from
operations exceeded its net income. In FY2010, Bed Bath & Beyond had negative
current operating accruals. However, this can be attributable to having higher taxes
payable and a larger stockpile of inventory, which can be explained by the uncertain
consumer spending habits generated by the financial downturn.
Table 1: Accruals ($ millions)
2006 2007 2008 2009 2010
Total Accruals (NI-OCF) -88 -19 -52 -159 -305
Current Operating Accruals 88 129 107 88 -14
Non-current Operating Accruals -176 -149 -159 -247 -291
Net Accruals (NI-FCF) 547 629 552 -19 172
Source: Financial Reports
Source: Financial Reports
One Time Events/Changes Over the past few years, Bed Bath & Beyond has had relatively few one-time accounting
charges and/or changes to its accounting methods.
0
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400
600
800
1000
Mill
ion
s o
f D
olla
rs
Figure 14: Net Income and Operating Cash Flow
Cash Flow from Operations Net Income
A Financial Analysis and Valuation of Bed Bath & Beyond
13 Harvard College Analyst Report | Bed Bath & Beyond
Asset Impairment BBBY notes that historically it has not impaired any of its long-lived or intangible assets.
The fair value of Bed Bath & Beyond’s intangible assets exceeds their book values.
However, within the footnotes, BBBY revealed that it may record asset impairments in
the future if the financial circumstances permit.
Reclassifications
Within BBBY’s 10K financial report, BBBY reported that in FY2006 it adopted a new
accounting strategy yielding a one-time $34.3 million net reduction in shareholder’s
equity. However, this change appears immaterial, since it did not drastically affect future
earnings.
Examination of Potential Red Flags
After a close examination of Bed Bath & Beyond’s financial data over the last 5 years,
there are no serious red flags that call into question the financial integrity of BBBY. The
few red flags that were identified can be explained by BBBY’s inability to unload a
larger amount of inventory than it was accustomed to. This led to an immaterial decrease
in net cash flow from operations from the previous year. It is important to note that these
increases in inventory can be explained by the onset of the financial crisis in 2007.
BBBY was able to respond to the worsened economic climate by limiting its inventory
purchases in 2008. Consequently, the Company did have negative free cash flow in
2007, which ordinarily would have drawn attention to the Company’s solvency.
However, BBBY is unlevered and has issued very little debt. The Company has utilized
its excess cash to repurchase stock, since it has utilized equity as a means of financing its
operations. Since BBBY has positive cash flow from operations and is not highly
levered, the large repurchases of stock are not worrisome.
Table 2: Examination of Potential Red Flags
2006 2007 2008 2009 2010
CFO < Net Income NO NO NO NO NO
CFO Decreased and Net Income Increased NO YES NO YES NO
Large Changes in Inventory, Receivables, or Payables NO YES NO NO NO
Large Adjustment Items NO NO NO NO NO
Negative Free Cash Flow NO YES NO NO NO
Dividends + Stock Repurchases > FCF YES NO YES NO NO
Large Non-Cash Acquisitions NO NO NO NO NO
Source: Financial Reports
A Financial Analysis and Valuation of Bed Bath & Beyond
14 Harvard College Analyst Report | Bed Bath & Beyond
Footnote Disclosures and Other Accounting Issues
Bed Bath & Beyond’s disclosures did not produce any material red flags. Detailed below
are some of BBBY’s most significant disclosures and their effects on BBBY’s financial
statements.
Cash and Cash Equivalents
BBBY classifies any liquid security with maturities less than three months as cash and
cash equivalents. Since BBBY identifies a small amount of assets as credit receivables
and has limited debt, BBBY’s liquidity is immaterially affected.
Inventories
Bed Bath & Beyond changed its method for calculating inventory costs for its subsidiary
buybuy BABY on March 2, 2008. Instead of applying the average inventory method,
BBBY calculated inventory costs using FIFO. Since buybuy BABY represents a
relatively small component of Bed Bath & Beyond’s overall business operations, this
change should be deemed as immaterial to BBBY’s financial statements. Of note, BBBY
estimates its shrinkage based on historical and current trends. Over the past decade, Bed
Bath & Beyond’s shrinkage has been relatively consistent.
Property and Equipment
BBBY records PP&E at cost according to GAAP standards. It records depreciation using
the straight-line method. BBBY charges maintenance and repairs to earnings. In 2007-
2009, the maintenance and repair costs were consistent and were $72.9 million, $81.1
million, and $86.2 million respectively.
Income Taxes In 2007, BBBY renewed its accounting guidance related to income taxes. Under this new
provision, the largest tax benefits included in BBBY’s financial statements are calculated
as the largest benefit that has been deemed as having greater than a 50% chance of being
realized upon clearance. Since BBBY is annually audited by a major accounting firm
that provides them with tax guidance, this change should not materially affect its
earnings.
Stock-Based Compensation
Bed Bath & Beyond records stock-based compensation awards using a fair value method
by recording compensation after it has been granted. BBBY includes stock options and
restricted stock awards when calculating stock-based compensation.
Summary of Analysis of Earnings Quality
Overall, Bed Bath & Beyond’s financial statements and financial disclosures found in the
footnotes contained within BBBY’s annual reports are extremely transparent and do not
raise significant red flags.
A Financial Analysis and Valuation of Bed Bath & Beyond
15 Harvard College Analyst Report | Bed Bath & Beyond
FORECASTING
The primary drivers of BBBY’s revenue are same store sales growth and the introduction
of new stores. BBBY has weathered the recession quite well, with same store sales
increasing by 4% in FY2009 and 8% in FY2010. To project forward same store sales, we
used the non-recessionary five-year average, as calculated by the past five years worth of
historical values, excluding the aberrantly low same-store sales decline witnessed in
FY2008. This produced a same store sales growth factor of 5.7%, which was then applied
to our projections. With respect to new stores, BBBY’s FY2010 10-K provided the
expectation of opening new stores in 2011 equal to roughly 4% of the current number of
stores. Given that 4% is already well below its five year average of nearly 7%, we viewed
this as a conservative and appropriate approximation, and thus new store openings were
projected forward as representing 4% of total stores. As indicated by our following pro-
forma financial statements, we expect BBBY’s store openings and same store sales
growth to continue to grow at the lower end of its pre-recessionary growth.
Revenues
BBBY has historically expanded its operations primarily via new store openings, in
contrast to acquisitions, a trend we expect to continue in the near to long term. Despite
the recent recession and the resultant widespread decline in discretionary spending,
BBBY has weathered the past few years quite well. The collapse of its largest competitor,
Linens ‘n Things, as well as its recent emphasis on providing low-cost items and budget
brands has allowed it to navigate this difficult economic environment with surprising
success. We expect these trends to continue and view our constant new store growth
projections likely even lie at the end of the potential spectrum insofar as they are based
off of the present expansion rate which is well below its pre-recessionary growth.
Moreover, if BBBY begins to capitalize on the economics of scale inherent in larger
operating models by establishing multiple larger distribution centers, it will greatly
reduce the per-store operating costs and thereby help to foster a much more rapid and
pronounced expansion in new store openings.
Source: Financial Reports
- 200 400 600 800
1,000 1,200 1,400 1,600 1,800
Figure 15: End of Year Store Count
A Financial Analysis and Valuation of Bed Bath & Beyond
16 Harvard College Analyst Report | Bed Bath & Beyond
As concerns existent stores, we expect sales growth to continue at a moderate rate of
5.7% per annum. Despite being below the 8% FY2010 growth, we view this rapid
increase in same store sales as being precipitated by exogenous shocks including the
financial distress of many of BBBY’s competitors, namely Linens ‘n Things. 5.7%
represents the non-recessionary average of BBBY’s same store sales growth and presents
a figure we consider to be very manageable. We further believe the present economic
climate to likely represent the nadir of consumer sentiment and that domestic home
furnishing spending will not retract further from its present level, but is instead more
likely to increase, thereby bolstering BBBY’s sales growth.
Table 3: Pro-Forma Store Count and Sales Growth ($ millions)
2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Store Count
1,139
1,185
1,232
1,281
1,332
1,386
1,441
1,499
1,559
1,621
1,686
Store Count Growth 3.5% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Same Store Sales
8,339
8,814
9,317
9,848
10,409
11,003
11,630
12,293
12,993
13,734
14,517
Same Store Sales Growth 7.8% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7%
New Stores
39
46
47
49
51
53
55
58
60
62
65
New Store Sales
419
436
454
472
491
510
531
552
574
597
621
Net Sales
8,759
9,251
9,770
10,320
10,900
11,513
12,160
12,845
13,567
14,331
15,138
Net Sales growth 11.9% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6%
Source: Financial Reports
Expenses
We projected forward BBBY’s cost of sales (COS) based on its historical COS/Sales
ratio of 58%. This ratio has been roughly constant over the past five years, and we do not
find anything inclining us to believe that BBBY will deviate from this trend. Similarly,
we project forward Selling, General & Administrative Expenses as 27% of net sales.
BBBY’s recent patterns have roughly mimicked this historical approximation, and we do
not expect any material changes to BBBY’s selling and distribution processes in the near
future. Interest Income has grown at approximately 3% over the past five years and we
projected forward interest income by forecasting future growth of 3%. Similarly,
BBBY’s historical combined income tax rate is 38.66%, and we projected future income
tax provisions by forecasting that BBBY will continue to face this combined income tax
rate. The marginal deviation of 2009 was attributable to a $3.2 million provision for the
recognition of certain discrete tax items as well as a partially offsetting adjustment in the
state tax rate on deferred income. We further assume no material changes in the corporate
tax levels and therefore forecast using the five-year historical average for the effective
corporate income tax rate.
A Financial Analysis and Valuation of Bed Bath & Beyond
17 Harvard College Analyst Report | Bed Bath & Beyond
Table 4: Pro-Forma Income Statement ($ millions)
2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Total Revenues
8,759
9,251
9,770
10,320
10,900
11,513
12,160
12,845
13,567
14,331
15,138
Costs of Sales
5,136
5,365
5,667
5,985
6,322
6,677
7,053
7,450
7,869
8,312
8,780
Gross Profit
3,623
3,885
4,104
4,334
4,578
4,835
5,107
5,395
5,698
6,019
6,358
SG&A
2,334
2,498
2,638
2,786
2,943
3,108
3,283
3,468
3,663
3,869
4,087
Operating Income
1,288
1,388
1,466
1,548
1,635
1,727
1,824
1,927
2,035
2,150
2,271
Interest Income
5
5
5
5
5
5
5
6
6
6
6
Pre-Tax Income
1,293
1,392
1,470
1,553
1,640
1,732
1,829
1,932
2,041
2,156
2,277
Income Tax Provision
502
538
568
600
634
670
707
747
789
833
880
Net Income
791
854
902
953
1,006
1,063
1,122
1,185
1,252
1,322
1,397
Source: Financial Reports
Balance Sheet Items
Projection of cash & cash equivalents was simply accomplished by adding the net change
in cash, as calculated in our pro-forma statement of cash flows, to the previous year’s
balance. The total change in cash for a given year is equal to the sum of net income plus
the net changes in operating, investing, and financing cash flows.
Our model assumes no growth in short-term investments beyond the present level. BBBY
holds such securities to accommodate excess free cash and its net amount of investment
securities has remained relatively constant historically. Inventory was projected to
remain constant as a percentage of sales at roughly 22.5%, which corresponds to its
historical average. We also projected other current assets to remain constant at its
FY2010 levels moving forward.
Long-term investments have remained fairly steady in recent years, and we forecast there
to be no growth above and beyond the FY2010 value moving forward. Similarly, other
long-term assets are projected to remain constant at its FY2010 levels moving forward.
Net PP&E is driven by our underlying assumptions in our pro-forma cash flow statement
concerning depreciation and expenditures. BBBY’s balance sheet as included in its
financial statements does not include a line item for accumulated depreciation. As a
result, we calculate Net PP&E as the previous year’s balance of PP&E plus capital
expenditures and minus depreciation expense. Capital expenditures have remained nearly
constant at 20% in the recent past, and we therefore use the three-year historical average
of 20.03% of net sales to forecast forward capital expenditures. Similarly, we forecasted
forward depreciation expense using the three-year historical average of 16.5%. From
A Financial Analysis and Valuation of Bed Bath & Beyond
18 Harvard College Analyst Report | Bed Bath & Beyond
these projections of depreciation expenses and capital expenditures we were able to
compute the Net PP&E observed in the balance sheet.
We projected accrued expenses, accounts payable, and merchandise credit based upon the
historical average percentage of total sales. We assumed no further growth in deferred
income tax over its FY2010 levels.
Table 5 : Pro-Forma Balance Sheet ($ millions)
2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Cash & Equivalents
1,184
1,230
1,287
1,348
1,414
1,486
1,566
1,653
1,750
1,858
1,977
Short Term Investments
606
606
606
606
606
606
606
606
606
606
606
Inventory
1,969
2,079
2,196
2,320
2,450
2,588
2,733
2,887
3,050
3,221
3,403
Other
316
316
316
316
316
316
316
316
316
316
316
Total Current Assets
4,074
4,230
4,404
4,589
4,785
4,996
5,221
5,462
5,722
6,001
6,301
Long Term Investments
121
121
121
121
121
121
121
121
121
121
121
Net PP&E
1,116
1,151
1,192
1,239
1,292
1,351
1,416
1,486
1,561
1,642
1,729
Other Assets
335
335
335
335
335
335
335
335
335
335
335
Long-Term Assets
1,572
1,607
1,648
1,695
1,748
1,807
1,872
1,942
2,017
2,098
2,185
Total Assets
5,646
5,837
6,052
6,284
6,534
6,803
7,092
7,404
7,739
8,099
8,486
Accounts Payable
710
736
777
821
867
916
967
1,022
1,079
1,140
1,204
Accrued Expenses
307
328
347
366
387
409
432
456
482
509
538
Merchandise Credit
193
204
216
228
240
254
268
283
299
316
334
Income Taxes
113
113
113
113
113
113
113
113
113
113
113
Total Current Liabilities
1,322
1,381
1,453
1,528
1,607
1,691
1,780
1,874
1,973
2,078
2,188
Deferred Rent and Other
292
292
292
292
292
292
292
292
292
292
292
Deferred Income Taxes
100
100
100
100
100
100
100
100
100
100
100
Total Long-Term Liabilities
392
392
392
392
392
392
392
392
392
392
392
Total Liabilities
1,715
1,773
1,845
1,920
2,000
2,084
2,172
2,266
2,365
2,470
2,581
Common Stock
3
3
3
3
3
3
3
3
3
3
3
Paid in Capital
1,191
1,191
1,191
1,191
1,191
1,191
1,191
1,191
1,191
1,191
1,191
Retained Earnings
5,546
6,400
7,302
8,255
9,261
10,323
11,445
12,631
13,883
15,205
16,601
Treasury Stock
(2,814)
(3,536)
(4,294)
(5,090)
(5,926)
(6,804)
(7,725)
(8,693)
(9,708)
(10,775)
(11,895
)
AOCI
5
5
5
5
5
5
5
5
5
5
5
Total Shareholder's Equity
3,932
4,064
4,208
4,364
4,534
4,719
4,920
5,138
5,374
5,629
5,906
Liabilities and Shareholder's
Equity
5,646
5,837
6,052
6,284
6,534
6,803
7,092
7,404
7,739
8,099
8,486
Source: Financial Reports
A Financial Analysis and Valuation of Bed Bath & Beyond
19 Harvard College Analyst Report | Bed Bath & Beyond
Forecasting Cash Flows
Given the scarcity of information pertaining to some of BBBY’s line items, we have only
provided line items for which there is a great deal of information and clarity and therefore
eliminated several historically volatile line items rather than attempting to forecast
forward their values without an adequate amount of information.
Operating cash flow is calculated as net income minus/plus any operating cash flows. As
is mentioned above, depreciation is forecasted forward as a percentage of total sales.
Similarly, cash flows from changes in inventory, accounts payable, accrued expenses and
merchandise credit are projected using their historical average percentage of net sales.
Investing cash flows are estimated using only capital expenditures, which we forecasted
forward, based on their historical percentage of net sales. We omitted several line items
pertaining to the purchase and sale of marketable securities insofar as based on the
limited information provided we do not have any reason to approximate such in-flows or
out-flows.
Cash flows from financing activities are equal to the repurchase of common stock,
including fees and issuance of dividends. We use this to control for the large cash
buildup in our valuations. Without putting its cash to use, Bed Bath & Beyond’s cash
reserves would exceed $8 billion by 2020. Bed Bath & Beyond, however, does not have
much use for this much cash, other than perhaps using it to make an acquisition.
Given its historical pattern of not engaging in acquisitions, it is far more likely that Bed
Bath & Beyond returns cash to investors through dividends or share repurchases.
Moreover, the company’s management announced in Q3 2011 that it would soon
commence a share buyback program. We projected forward future share repurchases by
applying a 5% per annum growth rate to the FY2010 value of share repurchases
inasmuch as this approximately represents the growth in net income. Doing so allows us
to more realistically model future growth in cash & cash equivalents.
A Financial Analysis and Valuation of Bed Bath & Beyond
20 Harvard College Analyst Report | Bed Bath & Beyond
Table 6: Pro-Forma Statement of Cash Flows ($ millions)
2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Net Income
854
902
953
1,006
1,063
1,122
1,185
1,252
1,322
1,397
Depreciation
153
157
162
168
175
182
191
200
210
220
Inventory
(111)
(117)
(123)
(130)
(138)
(146)
(154)
(162)
(172)
(181)
Accounts Payable
26
41
44
46
49
52
54
57
61
64
Accrued Expenses and Others
22
18
20
21
22
23
24
26
27
29
Merchandise Credit and Gift Cards
11
11
12
13
14
14
15
16
17
18
Cash Flows from Operations
956
1,014
1,066
1,123
1,183
1,248
1,316
1,388
1,465
1,546
Capital Expenditures
(188)
(198)
(209)
(221)
(234)
(247)
(261)
(275)
(291)
(307)
Cash Flows from Investing
(188)
(198)
(209)
(221)
(234)
(247)
(261)
(275)
(291)
(307)
Stock Repurchases and Dividends
(722)
(758)
(796)
(836)
(878)
(921)
(968)
(1,016)
(1,067)
(1,120)
Cash Flows from Financing
(722)
(758)
(796)
(836)
(878)
(921)
(968)
(1,016)
(1,067)
(1,120)
Net Change in Cash
46
57
61
66
72
79
88
97
107
119
Beginning Cash
1,184
1,230
1,287
1,348
1,414
1,486
1,566
1,653
1,750
1,858
Ending Cash
1,230
1,287
1,348
1,414
1,486
1,566
1,653
1,750
1,858
1,977
Source: Financial Reports
Earnings Per Share
Between FY2000 and FY2010, Bed Bath & Beyond’s earnings grew at a compound
annual growth rate (CAGR) of 16.2%, even after accounting for the recent recession.
This was driven by a 15.2% average annual increase in operating income and a 1.2%
annual decline in its diluted shares outstanding attributed to share buybacks.
Source: Financial Reports
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Figure 16: BBBY's Diluted EPS
A Financial Analysis and Valuation of Bed Bath & Beyond
21 Harvard College Analyst Report | Bed Bath & Beyond
Source: Financial Reports
Risk Profile With no long-term debt, the company’s exposure to financial market risk is relatively
low. It does not have regular interest payments it is expected to pay to debt-holders.
However, BBBY holds nearly 50% of its current assets in inventory. The high level of
inventory relative to cash and marketable securities accurately reflects Bed Bath &
Beyond’s business model but also contributes to some liquidity risk.
Current Asset and Liability Risk
BBBY’s current ratio stands at 3.1, has averaged roughly 2.5 over the last decade, and
bottomed out at 2.1 in 2007. The recent uptick in its current ratio reflects deepened cash
reserves, consistent with the overall theme of U.S. corporations’ behavior post-recession.
Given that management teams have incentives to maximize the current ratio, the
company’s maintenance of a current ratio around 2.5 is notable. Compared to the average
current ratio in the United States (near 1.0), Bed Bath & Beyond looks safe.
200000
220000
240000
260000
280000
300000
320000
Figure 17: BBBY's Diluted Shares Outstanding
A Financial Analysis and Valuation of Bed Bath & Beyond
22 Harvard College Analyst Report | Bed Bath & Beyond
Source: Financial Reports
Bed Bath & Beyond’s quick ratio stands at 1.6, has averaged 1.0 over the last decade, and
bottomed at 0.5 in 2007. The quick ratio compared to the current ratio reflects Bed Bath
& Beyond’s high amount of inventory. Since quick ratios of American companies
average near 0.5, it appears that Bed Bath & Beyond is relatively safe from this
perspective as well. Taken together, this indicates that Bed Bath & Beyond has very low
short-term liquidity risk.
Source: Financial Reports
Working Capital Turnover Analysis
As shown in the chart below, Bed Bath & Beyond’s working capital turnover ratios have
been fairly stable over the last decade. BBBY does not report accounts receivable
because all of its customers pay with cash, check, or credit card, which is all considered
cash or cash equivalents. Hence, it is not possible to show Days Sales Outstanding.
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
Figure 18: BBBY's Current Ratio
0.0
0.5
1.0
1.5
2.0
Figure 19: BBBY's Quick Ratio
A Financial Analysis and Valuation of Bed Bath & Beyond
23 Harvard College Analyst Report | Bed Bath & Beyond
The bargaining power of Bed Bath & Beyond’s suppliers is evident here. With
approximately 50 Days Payable Outstanding on average and nearly 150 Day Sales of
Inventory, Bed Bath & Beyond faces some risk in paying its suppliers on time. However,
with over $1.8 billion in cash and marketable securities, this risk to BBBY does not
appear to be large.
Source: Financial Reports
Bankruptcy Risk
Using Altman’s Z-Score to analyze Bed Bath & Beyond’s bankruptcy risk, the firm
appears to be at low risk for bankruptcy, with a current Z-score of 8.6 and a consistent Z-
score above 6 over the past decade.
Source: Financial Reports
-100
-50
0
50
100
150
200
Figure 20: Days Financing Required
BBBY's Day Sales of Inventory BBBY's Days Payable Outstanding
0
2
4
6
8
10
12
14
16
18
Figure 21: BBBY's Z-score
A Financial Analysis and Valuation of Bed Bath & Beyond
24 Harvard College Analyst Report | Bed Bath & Beyond
Future Potential for Leverage
Given our analysis, Bed Bath & Beyond could easily take on debt in the future. Bed Bath
& Beyond could benefit from the debt tax shield and lower overall cost of capital, since
its cost of debt would be lower than its cost of equity given its current capital structure.
With a low risk of bankruptcy and consistent positive operating income, Bed Bath &
Beyond could meet regular interest payments. Additionally, Bed Bath & Beyond likely
has adequate collateral for debt financing.
VALUATION
Discounted Cash Flow (DCF) Valuation
Discounted cash flow analysis is one of the primary methods that analysts use to value
companies. There are different ways to approach DCF analysis, but we have chosen to
use the “operating cash flow add-back method,” which starts with operating cash flow
and adds/subtracts out expenses that are related to or not related to the firm’s financing
decisions.
We obtained Bed Bath & Beyond’s equity beta from Bloomberg, which uses a weekly
interval for measuring the covariance between the performance of the broader stock
market and Bed Bath & Beyond’s stock. According to Bloomberg, Bed Bath & Beyond’s
equity beta was approximately 1.09. This is intuitive because Bed Bath & Beyond is in
the business of consumer durables, and therefore, the firm’s stock performance should
closely track the market at-large.
Since Bed Bath & Beyond has historically had little debt on its balance sheet and has not
demonstrated an intention to issue significant debt in the near future, the firm’s Weighted
Average Cost of Capital (WACC) equals its cost of equity. We derive the cost of equity
using the Capital Asset Pricing Model (CAPM). We use the 30-year U.S. Treasury rate of
3.14% and an equity risk (market) premium of 5.00% based on the consensus of analysts’
opinions. With a beta of 1.09, the CAPM results in a WACC of 8.59% for Bed Bath &
Beyond.
After determining the firm’s weighted average cost of capital, we apply the discount rate
to the cash flows generated by Bed Bath & Beyond’s business operations. We begin with
Cash Flow from Operations and subtract capital expenditures to derive company-level
Free Cash Flow. We have assumed an effective tax rate of 39%, the tax rate in FY2010.
Having completed this, we assume a 2% terminal growth rate (at or below expected U.S.
GDP growth) to estimate terminal value, discount all cash flows at the WACC and add
back excess cash, which we defined as cash and short-term marketable securities. Since
the latest 10K was published for FY 2010 last year, we estimated equity value per share
using the share price and number of shares outstanding both from February 2011, when
the 10K was issued and those same quantities from April 2012. During the time period
between February 2011 and April 2012, shares outstanding declined by nearly 20 million
A Financial Analysis and Valuation of Bed Bath & Beyond
25 Harvard College Analyst Report | Bed Bath & Beyond
as a result of share buyback, while the stock price rose 45% from $47.85 in February
2011 to the current share price of $69.41 (as of April 13, 2012). We find that the equity
value per share as of February 2011 using our model is $64.33, while as of April 2012 it
is $69.92. Given the current share price of $69.41, our model would suggest that Bed
Bath & Beyond is correctly valued today, and we would be inclined by the DCF to place
a “hold” rating on the stock. However, since we drive our model based only on FY2010
numbers and no new information, from the perspective of February 2011, our analysis
would suggest that BBBY was undervalued at a share price of $47.85. We see from
BBBY’s stock performance over the last year that the market agreed with this sentiment
Table 7: Discounted Cash Flow Analysis (in millions of dollars)
2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Cash Flow from Operations 987
956
1,014
1,066
1,123
1,183
1,248
1,316
1,388
1,465
1,546
Less CapEx (183) (188) (198) (209) (221) (234) (247) (261) (275) (291) (307)
FCF for All Stakeholders
804
768
815
857
902
950
1,001
1,055
1,113
1,174
1,239
Discount Factor
1.09
1.18
1.28
1.39
1.51
1.64
1.78
1.93
2.10
2.28
PV (FCF)
707
691
669
649
629
610
593
576
559
543
Terminal Value
8,247
Enterprise Value 14,474
Less Debt -
Plus Excess Cash 1,884
Equity Value 16,358
Shares Outstanding Feb 2011 254.3
Shares Outstanding April 2012 234.0
Equity Value per Share - Feb 2011 $ 64.33
Equity Value per Share - April 2012 $ 69.92
Residual Income Valuation
Our second valuation method is the residual income method that values BBBY by adding
the present value of excess returns earned by the firm over its required return on equity to
the current book value.
The main challenge we faced in conducting a residual income valuation was determining
the assumptions for cash management. Without returning cash to investors, Bed Bath &
Beyond’s cash reserves would exceed $8 billion by 2020, which would be unnecessarily
high, as cash alone would represent 68% of total assets as opposed to 21% today. Bed
Bath & Beyond does not have much use for this much cash, other than perhaps using it to
make an acquisition. A more likely scenario is that Bed Bath & Beyond returns cash to
investors through dividends or share repurchases. Historically, Bed Bath & Beyond has
not paid dividends and has done relatively minimal share buyback programs. Since we
A Financial Analysis and Valuation of Bed Bath & Beyond
26 Harvard College Analyst Report | Bed Bath & Beyond
cannot predict which method (share buybacks or dividends) Bed Bath & Beyond will
implement, we grouped share repurchases and potential dividends together in our cash
flow from financing. We took the amount of cash Bed Bath & Beyond returned to
investors in the form of share buybacks in FY2010 and grew that amount by 5% annually
until 2020. This is approximately the rate at which net income grows in our forecast.
(Confirming our assumptions from the perspective of FY2010, Bed Bath & Beyond did
in fact announce a share buyback program in Q3 2011).
Having determined the value of BBBY’s residual income (net income minus required
earnings, based on the firm’s total assets and cost of equity), we discounted at the firm’s
8.59% cost of equity. Assuming the same 2% terminal growth rate, we obtain a per-share
valuation for Bed Bath & Beyond of $51.41 from the perspective of February 2011 and
$55.88 from the perspective of April 2012 (see the DCF section for a discussion of why
we looked at both time periods). This would suggest that Bed Bath & Beyond is
overvalued today at a share price of $69.41, and we would be inclined to put a “sell”
rating on the stock based upon this valuation method.
Table 8: Residual Income Analysis (in millions of dollars)
2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Beginning Book Value
5,932
6,147
6,379
6,629
6,898
7,187
7,499
7,834
8,194
8,581
Cost of Equity 0.09 0.09 0.09 0.09 0.09 0.09 0.09 0.09 0.09 0.09
Required Earnings
510
528
548
569
593
647
675
705
737
772
Net Income
854
902
953
1,006
1,063
1,122
1,185
1,252
1,322
1,397
Less Required Earnings
(510)
(528)
(548)
(569)
(593)
(647)
(675)
(705)
(737)
(772)
Residual Earnings
344
374
405
437
470
475
510
547
585
624
Discount Factor
1.09
1.18
1.28
1.39
1.51
1.64
1.78
1.93
2.10
2.28
PV (Residual Income)
317
317
316
314
311
290
287
283
279
274
TV (Residual Income) 4,155
Total Residual Income
7,142
Calculated Book Value
13,074
Shares Outstanding - Feb 2011 254
Shares Outstanding - April 2012
234
Equity Value Per Share - Feb 2011 $51.41
Equity Value Per Share - April 2012 $55.88
Relative Valuation
Another common method of valuation is the analysis of comparable companies, which
benchmarks a company’s valuation against similar companies. Our peer group consists of
other publicly traded home furnishings retailers with similar business models. We find
A Financial Analysis and Valuation of Bed Bath & Beyond
27 Harvard College Analyst Report | Bed Bath & Beyond
that Bed Bath & Beyond is in-line with the industry average enterprise value to earnings
before interest, taxes, depreciation, and amortization multiple (EV/EBITDA) with a
multiple of 7.4x and is in-line with the industry average adjusted/pro-forma price to
earnings ratio with a multiple of 17.3x. Our findings support a “hold” rating for BBBY.
Table 9: Relative Valuation
Company Ticker Enterprise Value EV/EBITDA Pro Forma P/E
Bed Bath & Beyond BBBY $12,959,206 7.4x 17.3x
Williams Sonoma WSM $3,238,126 6.3x 16.9x
Pier One PIR $1,602,204 8.1x 11.7x
Cost Plus CPWM $426,225 8.3x 23.7x
Average 7.5x 17.4x
Source: Bloomberg