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r Bed Bath & Beyond, Inc.
(NASDAQ: BBBY)
November 3, 2014
Analyst: Aaron Meer
Sector Consumer Discretionary
Industry Specialty Retail
FYE End Mar. 2014
Current Price (11/01) $67.34
52 Week High (01/03/2014) $80.82
52 Week Low (06/26/2014) $54.95
Avg. Daily Vol. (Mil) 2.8
Beta 0.959
Mkt. Cap. (Mil) 12,226.92
Institutional Ownership (%) 91
Insider Ownership (%) 3.28
Outstanding Shares (Mil) 185.2
Float (Mil) 179.2
EPS (TTM) $4.82
Revenue (TTM) 11.5B
Dividend Yield (%) 0
Cash (MRQ) $1,226.63M
Debt (MRQ) $1,500.00 M
Net Profit Margin (%) 8.41
ROE (TTM) (%) 28.2
ROA (TTM) (%) 14.7
Operating Margin (TTM) (%) 14.0
Current Ratio (MRQ) 2.1
EV/EBITDA (TTM) 6.51
P/E (TTM) 13.99
P/E (Forward) 13.30
PEG 1.70
Executive Summary:
Bed Bath & Beyond Inc. (BBBY) is a chain of retail stores,
operating under the names Bed Bath & Beyond (BBB),
Christmas Tree Shops (CTS), Harmon and Harmon Face
Values (Harmon), buybuy BABY and Cost Plus World
Market (Cost Plus). The Company sells a wide assortment
of merchandise principally including domestics
merchandise and home furnishings as well as food,
giftware, health and beauty care items, and infant and
toddler merchandise. In addition, the Company, under
Linen Holdings LLC, provides various textile products,
amenities, and other goods to institutional customers in the
hospitality, cruise line, food service, healthcare, and other
industries. The Company was established in 1971, went
public in 1992, and is currently headquartered in Union,
New Jersey.
Investment Theses:
1. Macroeconomic Expectations and Industry
Outlook
Despite tough macro-environment the Company
has still performed well and any upside in
consumer spending and housing-related factors
should help.
2. Financial Position and Prudent Capital Allocation
Proven track record of high performance, battle-
tested management team, synergetic Cost Plus
acquisition, - trades at a discount to peers, low
absolute valuation.
3. Growth Prospects
Digital business is growing (online stores,
wedding invitations, and gift registry) and the
market is undervaluing their ability to compete
with online retailers; $3.0 billion share
repurchase program; store development plans
and international expansion capabilities.
INTRODUCTION
Recent Price: $67.34 Recommendation: Buy
Target Price: $83.90 Purpose: Value
SHARES AND RELATED DATA
FINANCIAL DATA
PROFITABILITY AND METRICS
VALUATION RATIOS
2 | P a g e
Bed Bath & Beyond Inc. was founded in 1971 by Leonard Feinstein and Warren Eisenberg, the
Co-Chairmen of the Company, who each hold more than 50 years of experience in the retail industry.
Starting small, the Company initiated operations in 1971 as Bed ‘n Bath with the opening of two stores,
which primarily sold bed linens and bath accessories. In 1985, the Company introduced its first store
carrying a full line of domestics merchandise and home furnishings. The Company underwent a
rebranding initiative in 1987, changing their name to "Bed Bath & Beyond" to reflect the expanded
product line offered by its stores and to distinguish its stores from conventional specialty retail stores
offering only domestics merchandise or home furnishings. Living up to its name, Bed Bath & Beyond has
strategically grown through acquiring, international expansion, omnichannel (multi-channel) retailing,
opening new stores, and diversifying their operational involvement (i.e. entering the bridal registry
space). On the other hand, in order to provide value to shareholders, the Company has taken part in a $3.0
billion share repurchase program over the last two years, returning approximately 90% of cash flow from
operations to shareholders, with intentions of continuing the repurchase program moving forward.
Steven H. Temares – CEO
Since, April 2004, Mr. Temares officially took the title as
CEO for Bed Bath & Beyond Inc. (BBBY). Mr. Temares’
involvement with BBBY extends far beyond 2004. June 1999
through April 2003, Mr. Temares served as the President and COO
and from April 2004 until January 2006 Mr. Temares served as the
President and CEO. Mr. Temares earned a B.A. degree from Rutgers
University in 1980 and attended the University of Pennsylvania Law
School, where he was awarded a J.D. in 1983. Before being hired by
Bed Bath & Beyond Inc. in 1992, Temares had been a real estate
lawyer, where he carried over this skillset as a Director of Real Estate
and General Counsel for BBBY until 1999 when he became part of
the executive management team as President and COO.
Warren Eisenberg – Co-Chairman & Co-Founder
Warren Eisenberg, 83, is a Co-Founder of the
Company and has served as Co-Chairman since 1999.
He has served as a director since 1971. Mr. Eisenberg
served as Chairman from 1992 to 1999, and served as
Co-Chief Executive Officer from 1971 to 2003.
Leonard Feinstein – Co-Chairman & Co-Founder
Leonard Feinstein, 77, is a Co-Founder of the
Company and has served as Co-Chairman since 1999. He has served as a director since 1971. Mr.
Feinstein served as President from 1992 to 1999, and served as Co-Chief Executive Officer from
1971 to 2003.
KEY MANAGEMENT PERSONNEL
COMPANY PROFILE
3 | P a g e
Recent Changes:
Since February 2014:
Mr. Eugene A. Castagna was promoted to Chief Operating Officer of Bed Bath
& Beyond Inc.
Susan E. Lattmann, formerly the Company's Vice President – Finance, was
promoted to Chief Financial Officer and Treasurer.
The specialty retail industry, a $453 billion industry, and specifically the home furnishing retail
sub-industry, a $21.6 billion segment, in which Bed Bath & Beyond operates, as noted below, has been an
underperformer all around as of late (versus broad market S&P 500, consumer discretionary sector, and
specialty retail industry). Over the previous 12 months, 6 months, 3 months, 1 month, and YTD
increments, the home furnishing retail sub-industry experienced the respective performance: -9.3%, -
1.7%, -2.4%, -4.3%, -14.9%. Bed Bath & Beyond comprises more than 54% of the home furnishing retail
sub-industry as the largest of the nine companies in the segment. The home furnishing sub-industry
valuation averages are as follows: EV/EBITDA (TTM) of 9.55, P/E (TTM) of 24.9, P/E (Forward) of
15.94, and PEG of 1.33.
Main factors impacting the home furnishing retail sub-industry and the consumer discretionary sector in
general are as follows:
KEY TRENDS & INDUSTRY OUTLOOK
4 | P a g e
Increased household debt
The first quarter of 2014 shows a $129 billion increase in overall household debt
from the previous period.
Source: New York Federal Reserve Quarterly Report on Household Debt and
Credit
Decreased consumer confidence September experienced a decrease in consumer confidence, now standing at 86.0
down from 93.4 in August.
Source: September 2014 Consumer Confidence Survey®
The Conference Board
Falling consumer price index and commodities (gasoline)
The seasonally adjusted decline in the all items index was the first since April 2013.
5 | P a g e
Shift in “gifting” behavior
Self-gifting is expected to decline this holiday season from an average $134.77 in
2013, to $126.68.
Source: A Marketer's Guide to Discretionary Income
Consumer Research Center, The Conference Board
Increased real disposable income
“About 57 million U.S. households now have discretionary income, up from nearly
54 million in 1997-1998.”
Source: A Marketer's Guide to Discretionary Income
Consumer Research Center, The Conference Board
"Discretionary income is a major force in the health and growth of the overall
economy." Rising numbers of affluent households who control sizable amounts of
discretionary income signal a favorable outlook for the luxury, travel and
entertainment markets, as well as companies in the furnishings and housing sectors."
Source: Lynn Franco, Director of The Conference Board's Consumer
Research Center
Personal income increased $47.3 billion, or 0.3 percent, and disposable personal
income (DPI) increased $35.2 billion, or 0.3 percent, in October.
Source: Bureau of Economic Analysis
Deloitte suggests lower gas prices could free up $260 per
household this year in the United States.
Oct. 16, 2014 -- National Retail Federation said it
expects holiday sales to rise 4.1 percent to $616.9 billion.
That's higher than 2013's actual 3.1 percent increase
during the same time frame, November and December.
6 | P a g e
Increased employment figures
In September, the unemployment rate declined by 0.2 percentage point to 5.9 percent.
The number of unemployed persons decreased by 329,000 to 9.3 million.
Over 2014, the unemployment rate and the number of unemployed persons are down
by 1.3 percentage points and 1.9 million, respectively.
Source: U.S. Bureau of Labor Statistics | Division of Labor Force Statistics
Drop in mortgage rates and increased housing starts construction A drop in mortgage rates has the potential to boost home sales and gives builders
reason to take on more projects.
Fannie Mae and Freddie Mac reach deal to ease mortgage lending -- Minimum down
payment decreased to 3% from 5% generally needed to qualify for selling the loans
to Fannie and Freddie.
October 18, 2014 -- Average rates on 30-year home loans fell this week to 3.97
percent, the lowest since June 2013.
Source: Freddie Mac
October 18, 2014 -- Housing starts climbed 6.3 percent in September to an annual
pace of 1.02 million, crossing what McGrath called the "psychologically important" 1
million barrier.
Source: Commerce Department
Online Retailers Entering the Brick and Mortar Space
Amazon
Athleta (San Francisco)
Piperlime
BaubleBar
Rent the Runway
Boston Proper
Bonobos
Warby Parker
Birchbox
JustFab
Frank & Oak
Increased presence and acceptance of home improvement-related web sites, resources,
and online communities by retailers
Houzz
The Houzz platform and mobile apps feature interior and exterior home
photos, articles written by architects, interior designers and home design
experts, product recommendations, and a user forum.
ATGStores.com
ATG Stores (Allied Trade Group, Inc.) is a Lowe's Company since 2011, and
an e-commerce company that operates around 500 online stores (websites) in
markets such as home improvement and home furnishing products.
Currently, ATGStores.com features more than 3.5 million products in a host
7 | P a g e
of different categories ranging from lighting and plumbing to furniture and
hardware.
DIY ready
The leading online source for do-it-yourself projects - provides readers with
videos, tutorials, techniques, money savers, time management skills, and
more.
Bed Bath & Beyond, through its strategic acquisitions/partnerships, superior human capital
retention originating with their battle-tested management team, diversified and innovative product
offerings such as wedding invitations and gift and bridal registry, and operational expertise, holds the title
as the largest player in the home furnishing segment of the specialty retail industry and a leading seller of
products for the home, including sheets, pillows, blankets and window treatments. Bed Bath & Beyond’s
success has come during a time of immense competition from e-commerce giants such as Amazon, eBay,
Alibaba, among others and sub-optimal consumer confidence and spending levels. For the year ending
2014, Bed Bath & Beyond generated $11.5 billion in revenue, providing an industry leading 25.5% return
on equity. Bed Bath & Beyond’s success is partly contributable to their acquisitions, which provided
continual growth opportunities and increased macroeconomic resistance. Bed Bath & Beyond’s current
operations, product offerings, and revenue stream are generated from the following:
Bed Bath & Beyond (Core Business) – Operating since 1971
A chain of 1,017, as of 2Q 2015, domestic
merchandise retail stores located in the United
States, Canada, and Mexico. Bed Bath & Beyond sells
a wide assortment of domestic merchandise (i.e. bed
linens) and home furnishings (i.e. kitchen items). The
Company’s numerous store offerings make it the ultimate “one stop shop” and provide
greater convenience than most other department stores or other specialty retail stores. For
the fiscal year ending 2013, 12 new Bed Bath & Beyond branded stores were opened
throughout the United States and Canada.
Harmon Stores (Harmon Face Values) – Acquired in March 2002
Harmon Face Values is a retail chain selling leading
cosmetics, health and beauty products through its 50
stores, as of 2Q 2015, in NJ, NY, CT, FL, and PA.
Additionally, Harmon operates as a “store within a store” in many Bed Bath & Beyond,
Christmas Tree Shops and buybuy BABY locations.
Christmas Tree Shops (CTS) – Acquired in June 2003 for $200 million
A retail chain of 78 stores, as of 2Q 2015, that started in Cape
Cod in 1970. The original stores are seen as a local
phenomenon, since it has become a must see destination for
BUSINESS OVERVIEW
8 | P a g e
many visitors when traveling to Cape Cod. With many of its stores resembling older
architectural style, Christmas Tree Shops operates as bargain stores, selling everything
from food to toys to household furnishings to, of course, Christmas decorations. Some of
CTS stores are located within shopping malls and CTS also operates “express” stores
which are smaller and provide a more highly concentrated seasonal product offering, as
well as “andThat” stores in Fredericksburg, VA and Flint, MI in an attempt to limit the
confusion in parts of the country that are unfamiliar with the traditional Christmas Tree
Shops name.
Buybuy BABY – Acquired in March 2007 for $67 million
A chain of 92 stores, as of 2Q 2015, that sell clothing, strollers
and other items for use with infants and young
children. buybuy BABY has grown immensely since the 2007
acquisition, when it consisted of only 8 stores. The Company’s
primary competitor is Babies “R” Us.
Cost Plus World Market (World Market) – Acquired in May 2012 for $495 million
Headquartered in California, Cost Plus World Market operates
a chain of 269 specialty/import retail stores, as of 2Q 2015,
selling home furniture, decor, curtains, rugs, gifts, apparel,
coffee, wine, craft beer, as well as several international food
products. The brand's name originated from the initial concept,
since abandoned, of selling items for "cost plus 10%". The
Cost Plus acquisition is value-adding and gives Bed Bath three
opportunities to add value for shareholders:
Cross selling Cost Plus merchandise in Bed Bath & Beyond and Christmas Tree
Shops
Expanding the Cost Plus store base, increasing traffic and subsequent revenue to
this segment of the business.
Cross selling Bed Bath & Beyond products in Cost Plus stores.
Linen Holdings, LLC – Acquired in June 2012 for $105 million
NJ-based distributor of bath, bed and table linens and other textile products to
institutional customers in the hospitality, cruise line, food service, healthcare and other
industries. Linen Holdings and Bed Bath & Beyond synergies include:
Increased sourcing capabilities
Access to a new and diverse customer base.
Bed Bath & Beyond Mexico - Joint venture in 2008 for $4 million
9 | P a g e
In 2008, the Company became a partner in a joint venture with Home & More, which
currently operates five stores in Mexico City market under the Bed Bath & Beyond name
due to rebranding in fiscal year 2012. Steven Temares, CEO, “believes there is a
significant opportunity for future growth throughout Mexico" and that the Home & More
partnership is bound to be successful due to their “depth of retail experience and local
knowledge in Mexico [which] supports our partnership's short and long-term prospects
for growth within Mexico.”
Bed Bath & Beyond Invitations – an online wedding invitation venture
Bed Bath & Beyond partnered with Rexcraft, one of America’s leading providers of
invitations & accessories, to provide a wide assortment of beautiful wedding invitations
and accessories.
Bed Bath & Beyond accounts for its operations as two operating segments:
1. North American Retail
Bed Bath & Beyond
Harmon Stores (Harmon Face Values)
Christmas Tree Shops (CTS)
Buybuy BABY
Bed Bath & Beyond Mexico
Bed Bath & Beyond Invitations
2. Institutional Sales
Institutional Sales is comprised solely of Linen Holdings, which does not
meet the quantitative thresholds under U.S. generally accepted accounting
principles and therefore is not a reportable segment.
Home Furnishings & Other Items: Kitchen and tabletop items, fine tabletop, basic
housewares, general home furnishings, consumables, and certain juvenile products.
REVENUE SEGMENTATION
$7,362.50 ,
64%
$4,141.50 ,
36%
2014 Revenue (Mil)
Home Furnishings & Other
Items
Domestics Merchandise
10 | P a g e
Domestics Merchandise: Bed linens and related items, bath items, and kitchen textiles.
Location: The Company’s 1,506 stores are located in all 50 states, the District of
Columbia, Puerto Rico and Canada. All of the stores are corporately owned (no
franchisees) and typically located in suburban areas of medium and large-sized cities,
commonly situated in strip and power strip shopping centers, major off-price and
conventional malls, and free standing buildings.
Expansion: In the 23-year period from the beginning of fiscal 1992 to the end of fiscal 2014, the
chain has grown from 34 stores to 1,506 stores plus its various websites, other interactive platforms
and distribution facilities.
Size: Stores range in size from approximately 5,000 to 100,000 square feet, but are predominantly
between 18,000 and 50,000 square feet.
Utilization: Approximately 85% to 90% of store space is used for selling areas.
Seasonality: The Company’s sales are generally higher in the calendar months of August, November
and December and generally lower in February.
Macroeconomic Expectations and Industry Outlook
Despite the competitive and unforgiving macro-environment, Bed Bath & Beyond has performed
consistently well and outlived many big box retail peers, such as its’ only genuine competitor Linens
‘n Things, which in 2008 closed its stores. Even through the height of the recent recession, Bed Bath
& Beyond yielded a 5.9% net profit margin, which would place amongst the best in the home
furnishing sub-industry currently.
Consumer spending is set up for record levels this upcoming holiday season as commodities have
seen their lowest levels for years. Deloitte suggests lower gas prices could free up $260 per household
INVESTMENT THESES
1,017
269
92 78 50
Business Segmentation
Bed Bath & Beyond
World Market (Cost
Plus)
buybuy BABY Stores
Christmas Tree
Shops (CTS)
Harmon Stores
11 | P a g e
this year in the United States. Moreover, on October 16, 2014, the National Retail Federation said it
expects holiday sales to rise 4.1 percent to $616.9 billion, which is higher than last year’s actual 3.1
percent increase during the same time frame, November and December. Gas prices are seeing their
lowest levels since June of 2012, and Bed Bath & Beyond is well-positioned, with its 1,506 stores and
diversified portfolio of product offerings, to capture this increased consumer spending. Moreover,
personal income has increased $47.3 billion, or 0.3 percent, and disposable personal income (DPI)
increased $35.2 billion, or 0.3 percent, in October.
Home-related factors such as home construction levels, home purchasing, average household
value, household debt, are looking positive and are highly related to the future growth potential of the
home furnishing sub-industry. With this in mind, the macroeconomic environment is expected to be
more favorable for Bed Bath & Beyond as Fannie Mae and Freddie Mac have announced in mid-
October that a deal has been reached to ease mortgage lending standards and decrease the minimum
down payment from 5% to 3% needed to qualify for selling loans to Fannie and Freddie. Thus, home
purchasing is expected to increase and higher home furnishing sales are likely as a result. Along those
lines, as of October 18, 2014, average rates on 30-year home loans fell to 3.97 percent, the lowest
since June 2013, which proves favorable for prospective home ownership. To prove this point,
according to the Commerce Department “housing starts climbed 6.3 percent in September to an
annual pace of 1.02 million, crossing what the McGrath calls the "psychologically important" 1
million barrier.” Additionally, Houzz, a web site and online community focusing on home furnishing
and design, mentioned that “The prospects for Houzz look bright as the Home Improvement Research
Institute expects more than $300 billion to be spent this year on remodeling projects.” Additionally,
the Home Improvement Research Institute estimates that “84 percent of homeowners are planning to
do renovation projects in the next two years” which will likely translate into increased sales for Bed
Bath & Beyond.
Financial Position and Prudent Capital Allocation
Bed Bath & Beyond has a proven track record of high performance which is driven by a battle-
tested management team spanning over 50 years, trades at a discount to peers, and exercises prudent
capital allocation practices such with example of the 2012 acquisition of Cost Plus.
Bed Bath & Beyond, despite making up more than 50% of the home furnishing sub-industry,
trades at a 31.48% discount to industry peers based on EV/EBITDA (TTM), P/E (TTM), P/E (Forward),
and PEG multiples. Moreover, Bed Bath & Beyond’s seasoned management team proves effective
managing large amounts of cash. Currently, Bed Bath & Beyond has over $1.2 billion in cash which can
be used to open new stores, improve existing stores and repurchase shares, which are the viable growth
prospects that are discussed later. Even though the Company took on $1.5 billion in debt, the after tax
cost of debt is only 3.0% and should not impact Bed Bath & Beyond’s growth potential.
Moreover, Bed Bath & Beyond’s historical financial performance is unparalleled - the Company’s
revenue, net income margin, return on assets, and return on equity increased each year from 2005-2014,
except for fiscal 2009 (February ’09) margins, despite the tough, unfavorable macro-economic landscape.
Bed Bath & Beyond’s prudent capital allocation is prevalent in the $495 acquisition of Cost Plus
in 2012, which will continue to add value for shareholders for three reasons:
1. Selling Cost Plus merchandise in Bed Bath and Christmas Tree Shops
2. Growing the Cost Plus store base
3. Adding products traditionally sold in Bed Bath stores to Cost Plus stores.
12 | P a g e
All of the aforementioned can be expected due to Bed Bath & Beyond’s recent inclusion of health
and beauty merchandise from its Harmon chain to its Bed Bath & Beyond and Christmas Tree stores.
Essentially, the Cost Plus merchandise, which includes food, will help Bed Bath to drive traffic, gain
market share, and sharpen its edge against online retailers. The acquisition continues Bed Bath's efforts to
expand its business with existing customers. Going off these same lines, Bed Bath & Beyond proved
prudent capital allocation with its acquisition of Linen Holdings, LLC in June 2012 for $105 million
which will provide increased sourcing capabilities and access to a new and diverse institutional customer
base.
Bed Bath's edge comes from the decentralized merchandising strategy, implemented on behalf of
the store managers, who are authorized to make decisions based on local demographics and climate. As
an example, some stores in New York sell window fans in the winter; managers understand that residents
don't have total control of the heat in some apartment buildings and want fresh air. Some of the New York
stores also provide delivery service and help shoppers to get taxis. Similarly, the Christmas Tree Shops on
Cape Cod have an abundance of beach chairs, boogie boards, sand toys, and plastic plates and utensils.
Overall, Bed Bath & Beyond is a dominant player in the home furnishing space, hub of human
capital and industry experience, delivers consistent value to shareholders, trades at a discount to peers,
and has proven to prudently allocate capital as well as manage its resources, which will allow for future
share appreciation.
Growth Prospects
Due to the incessant media coverage of PayPal, Amazon, eBay, Alibaba, and other e-commerce
players, many people are discerning that online retail will put Bed Bath & Beyond out of business – I
argue the contrary. Online retail has been a big trend and wave of the future, one in which Bed Bath &
Beyond has adapted to very well. Company management noted in the second quarter 2014 (2Q15) that
“online sales were up more than 50%, while sales in stores were slightly positive.” Clearly, Bed Bath &
Beyond is adjusting to the online transition and is also expected to see higher margins in the future after
their omnichannel (multi-channel retail) development expenses reside. Currently, Bed Bath & Beyond has
taken advantage of the online retail sphere and launched a wedding invitations venture and
consequentially partnered with Rexcraft, one of America’s leading providers of invitations & accessories,
to provide a wide assortment of beautiful wedding invitations and accessories. Additionally, Bed Bath &
Beyond has make a name for itself in the gift registry business by providing gift registry services for
events ranging from birthdays to weddings to anniversaries to business promotions. A gift registry is a
wish list that works as follows: a recipient compiles a list of items (wish list) and makes it public to
invited guests by providing the retailer with the wish list who will maintain the list for the registrant and
make sure that items are removed from the list as they are purchased.
While technology and online e-commerce seems like the hands-down winner, Nadia
Shouraboura, former VP of Technology at Amazon mentioned, with regards to Amazon’s recent decision
to open a brick and mortar location, that “Amazon’s need for a physical store goes beyond mere logistics
to a more fundamental truth about retail: Sometimes, “you just have to touch and feel products.”
Shouraboura highlights two main points: 1) Physical, brick and mortar retailers such as Bed Bath &
Beyond provide a tangible and convenient value non-permissible by Amazon and other online-only
retailers; and 2) Amazon, despite its prospective challenges with real estate selection, store design, in-
person customer service, marketing and merchandising, decided to open a retail location because of its
undeniable convenience to the customer. Bed Bath & Beyond benefits from an extensive network of
1,506 stores located throughout the United States, Mexico, and Canada because it allows for customers to
get what they want, how they want it, and when they want it. According to Newmarketbuilders
consulting firm, “Physical stores are becoming more important because of mobile devices. Ordering
13 | P a g e
something online and getting UPS to deliver the package to your home is not always the most efficient
way.” With this in mind, “those who purchase online but choose to pick up orders inside a store account
for 40 percent of Best Buy’s annual e-commerce sales.” Undoubtedly, a physical retail presence does not
equate Bed Bath & Beyond with antiquity, but rather provides them the necessary platform for future
online growth.
Bed Bath & Beyond’s digital business can be expected to grow due to the increased presence of
home improvement-related web sites, resources, and online communities such as Houzz, ATGStores.com,
DIY ready, among many others. While it seems at first that these online home-related resources are
competitors to Bed Bath & Beyond, in reality, many of the existing home furnishing web sites such as
Houzz increase Bed Bath & Beyond’s revenue by featuring the Company’s products on their web site.
Furthermore, companies such as Houzz are potential and realistic acquisition targets for Bed Bath &
Beyond (i.e. Lowe’s acquired ATGStores.com) considering the value-add in the form of an increased
customer base - Houzz has 20 million active users - as well as the ability for Bed Bath & Beyond to filter
Houzz’ showcased products and services offerings to benefit the Company.
A key catalyst of future share price appreciation for Bed Bath & Beyond is the $3.0 billion share
repurchase program. On July 7, Bed Bath announced a $2 billion addition to its share repurchase
program, on top of the approximately $860 million that remained at the end of 1Q. Subsequent to that
announcement, management borrowed $1.5 billion, part of which was used to fund approximately $1.0
billion of share purchases in 2Q, representing approximately 16.9 million shares. Over the last two years,
the company has returned approximately 90% of cash flow from operations to shareholders through its
share repurchase program and I believe that this trend will continue.
Management noted during the 2Q conference call that “there is room to operate more than 1,300
Bed Bath stores as well as additional baby, World Market and Christmas Tree Shops.” Undoubtedly, store
development plans are underway, which will help the Company sustain above-average growth.
Second Quarter 2014 (2Q15)
On September 23, Bed Bath reported fiscal second-quarter earnings of $1.17 per share, up
from $1.16 in the prior-year quarter.
July 15, 2014 -- Bed Bath & Beyond Inc. today announced the pricing of three series of
senior unsecured notes for an aggregate principal amount of $1.5 billion.
July 15, 2014 -- The Company has also announced that it is in discussions with lenders to
enter into a $250 million senior unsecured revolving credit facility, expiring in 2019,
unless extended pursuant to its terms.
2Q15 net sales increase by 4.3%, comparable store sales increase by 3.4%
.
Management noted during the 2Q conference call that there is room to operate more than
1,300 Bed Bath stores as well as additional baby, World Market and Christmas Tree
Shops.
RECENT COMPANY HIGHLIGHTS
14 | P a g e
Management said that online sales were up more than 50%, while sales in stores were
slightly positive.
The Company is modeling net earnings per diluted share to be approximately $1.17 to
$1.21 for the fiscal third quarter of 2014 (announced 12/17/2014), approximately $1.78 to
$1.83 for the fiscal fourth quarter of 2014, and approximately $5.00 to $5.08 for the fiscal
full year.
The average transaction amount and the number of transactions were both higher.
$3 Billion Share Repurchase Program
On July 7, Bed Bath announced a $2 billion addition to its share repurchase program, on
top of the approximately $860 million that remained at the end of 1Q. Subsequent to that
announcement, management borrowed $1.5 billion, part of which was used to fund
approximately $1.0 billion of share purchases in 2Q, representing approximately 16.9
million shares.
First Quarter 2014 (1Q15)
During the fiscal first quarter of 2014, the Company repurchased approximately $273
million of its common stock, representing approximately 4.2 million shares.
Fourth Quarter 2013 (4Q14)
Feb. 26, 2014 -- Bed Bath & Beyond Inc. announced the promotion of Eugene A.
Castagna, previously the Company's Chief Financial Officer and Treasurer, to the role of
Chief Operating Officer. Susan E. Lattmann, formerly the Company's Vice President –
Finance, has been promoted to Chief Financial Officer and Treasurer.
Feb. 20, 2014 -- Bed Bath & Beyond Inc. announced today the election of Geraldine
"Gerri" Elliott as an additional independent member of the Company's Board of
Directors, expanding the Board to ten members. Ms. Elliott, 57, is Executive Vice
President (EVP) and Chief Customer Officer at Juniper Networks.
Within the specialty retail industry, Bed Bath & Beyond’s falls under the home furnishing sub-
industry classification. The home furnishing sub-industry, a $21.6 billion segment of specialty retail, is
comprised of nine companies, where Bed Bath & Beyond, $11.7 billion market capitalization, is by far
the largest competitor by market capitalization, nearly double the size of the next largest competitor,
Williams-Sonoma Inc. with a market capitalization of $5.9 billion. Bed Bath & Beyond provides the
highest EPS, at $5.06, among competitors with less volatility considering its beta falls closer to the
overall market at .959 than its peers whose betas range between 1.3 and 2.0.
Considering domestics merchandise and home furnishing items are purchasable, yet to a lesser
degree, at home improvement stores, I included the home improvement retail sub-industry, a $174.9
billion segment of specialty retail, which is comprised of five companies as potential competitors.
Nonetheless, due to the points of difference among the home furnishing and home improvement sub-
COMPETITORS
15 | P a g e
industries and their non-competing resources/appeal, I weighted the home improvement sub-industry at
10% of the relative valuation and the remaining 90% of the relative valuation was determined by the
peers within the home furnishing retail sub-industry.
Aaron's Inc. (NYSE: AAN) – Market Capitalization: $1.8 billion
Specialty retailer of consumer electronics, computers, residential
furniture, household appliances and accessories and is the nation's second-largest chain of rent-to-own
furniture and appliances. Aaron’s is engaged in the lease ownership, lease and retail sale of a variety of
products, such as widescreen and liquid crystal display (LCD) televisions, computers, living room, dining
room and bedroom furniture, washers, dryers and refrigerators. It carries brands, such as JVC, Mitsubishi,
Philips, Panasonic, Sony, Dell, Hewlett-Packard, Simmons, Frigidaire, and Sharp. It operates in four
segments: Sales and Lease Ownership, Franchise, HomeSmart, and Manufacturing. It focuses on
expanding its sales and lease ownership business, which includes Aaron’s Sales & Lease Ownership and
HomeSmart stores. In April 2014, the Company acquired Progressive Finance Holdings LLC. Bed Bath
& Beyond and Aaron’s business focus are very closely aligned, which could pose a threat to Bed
Bath & Beyond if Aaron’s is seen as a more reasonable acquisition target by a large home
improvement retailer such as Home Depot. More importantly, Aaron’s does very well in the rent-
to-own segment of the furniture business, whereas Bed Bath & Beyond remains inactive. If
economic factors shift the landscape in favor of the rent-to-own business model, Bed Bath &
Beyond’s operational and financial performance could adversely be affected. Nonetheless, Bed
Bath & Beyond has been able to compete among large competitors for decades and managed to
run its largest competitor out, Linens 'n Things Inc., out of business in 2008.
Haverty Furniture Companies Inc. (NYSE: HVT) – Market Capitalization: $431.4 million
Haverty Furniture Companies, Inc. (Havertys) is a specialty retailer of
residential furniture and accessories. All of its retail locations are operated
using the Havertys name and the Company does not franchise its stores. The Company provides its
customers a selection of products and styles, and most of the furniture merchandise it carries bears the
Havertys brand. It also offers the mattress product lines of Sealy, Serta and Tempur-Pedic. As of
December 31, 2012, the Company operated 122 stores serving 81 cities in 17 states with approximately
4.4 million retail square feet. During the year ended December 31, 2012, approximately 73% of its leather
merchandise selection was imported from Mexico or Asia. In 2012, the Company’s bedroom furniture
accounted for 19.4%; dining room furniture accounted for 10.7%; occasional accounted for 11.0%;
upholstery accounted for 38.2%; mattresses accounted for 11.5%, and accessories and other accounted for
9.2% of the Company’s gross revenue. Haverty’s poses a threat to Bed Bath & Beyond solely because of
the closeness of their business models, product offerings, and revenue segmentation. Yet, Haverty’s
smaller size and fewer resources allow Bed Bath & Beyond to see Haverty as a potential acquisition
target rather than abominable competitor.
Kirkland’s Inc. (NASDAQ: KIRK) – Market Capitalization: $284.2 million
Kirkland’s, Inc. (Kirkland’s) since 1981, is a specialty retailer of home
decor and gifts in the United States. As of February 2, 2013, the Company
operated 323 stores in 35 states. The Company’s stores present a line of
merchandise, including framed art, mirrors, wall decor, candles and related items, lamps, decorative
accessories, accent furniture, candles and related items, textiles, outdoor accessories, and artificial floral
products. The Company’s stores also offer an assortment of holiday merchandise during seasonal periods,
as well as items carried throughout the year suitable for gift-giving. Its stores operate under the names,
16 | P a g e
such as Kirkland’s, Kirkland’s Home, Kirkland’s Home Outlet and Kirkland’s Collection. In addition to
its stores, the Company sells direct-to-customer through its Website at www.kirklands.com. Kirkland’s
poses a threat to Bed Bath & Beyond due to their focus on gifting and their business cyclicality, with
growth mainly occurring over holidays. Despite holiday spending expectations to reach all-time highs,
Kirkland’s size and scale allow the Company to see Kirkland’s as a potential acquisition target rather than
a fierce competitor.
Mattress Firm Holding Corp. (NASDAQ: MFRM) – Market Capitalization: $2.0 billion
Mattress Firm Holding Corp. (Mattress Firm) is a specialty retailer of
mattresses and related products and accessories in the United States. The
Company conducts its operations through its indirect, wholly owned
subsidiary, Mattress Holding Corp. and its subsidiaries. As of January 28, 2014, the Company and its
franchisees operated 1,225 and 136 stores, respectively, primarily under the Mattress Firm name, in 89
markets across 35 states. The Company focuses on the national brands, but also offers its customers its
Hampton and Rhodes private label mattresses. The Company has introduced its YuMe brand. The Back to
Bed, Bedding Experts and Mattress Barn Retail Stores added approximately 135 mattress specialty retail
stores to the Mattress Firm Company-operated store base in both new and existing markets. While
Mattress Firm’s core focus does not overlap exactly with Bed Bath & Beyond’s currently, their larger size
(comparably) allows them to use their distinct customer base and resources to expand into a more closely
related home furnishing segment with a better likelihood of success.
Pier 1 Imports Inc. (NYSE: PIR) – Market Capitalization: $1.1B
Pier 1 Imports, Inc. (Pier 1 Imports) is a global importer of imported
decorative home furnishings and gifts. As of March 2, 2013, the Company had
1,062 stores in the United States and Canada. During the fiscal year ended
March 2, 2013 (fiscal 2013), the Company opened 22 new Pier 1 Imports stores and closed 12 stores. The
Company operates regional distribution center facilities in or near Baltimore, Maryland; Columbus, Ohio;
Fort Worth, Texas; Ontario, California; Savannah, Georgia, and Tacoma, Washington. The specialty retail
operations of the Company consist of retail stores and e-Commerce operations conducting business under
the name Pier 1 Imports, which sell a range of furniture, decorative home furnishings, dining and kitchen
goods, candles, gifts and other specialty items for the home. Pier 1 Imports is a prominent competitor to
Bed Bath & Beyond due to their size, similar number of store locations, and diversified home furnishing
product offerings.
Restoration Hardware Holdings Inc. (NYSE: RH) – Market Capitalization: $3.0 billion
Restoration Hardware Holdings, Inc. (Restoration Hardware Holdings)
is a holding company. The Company is merchants of home furnishings.
Restoration Hardware Holdings offers merchandise assortments across a number of categories, including
furniture, lighting, textiles, bath ware, decor, outdoor, garden, and baby and child products. The
Company’s business is integrated across its multiple channels of distribution, consists of its stores,
catalogs and Websites. As of July 28, 2012, the Company’s operated a total of 73 retail stores, consisted
of 71 Galleries and two full line Design Galleries, and 10 outlet stores throughout the United States and
Canada. RH is a brand in the home furnishings. During the fiscal year ended January 28, 2012 (fiscal
2011), the Company opened five stores and closed 22 stores. In fiscal 2011, Restoration Hardware
Holdings distributed approximately 26.1 million catalogs, and its Websites logged over 14.3 million
visits. Restoration Hardware’s diversified portfolio of product offerings, which are all integrated, poses a
threat to Bed Bath & Beyond’s plan to be the ultimate one-stop-shop within the home furnishing market.
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Select Comfort Corp. (NASDAQ: SCSS) – Market Capitalization: $1.1 billion
Select Comfort Corporation (Select Comfort) is a bed manufacturer
and retailer. The Company is a manufacturer, marketer, retailer and servicer of
the Sleep Number bed, which allows individuals to adjust the firmness and
support on each side at the touch of a button. The Company offers Sleep
Number beds in four series, which includes Classic Series, Performance Series, Innovation Series and
Memory Foam Series. The Sleep Number bed series are available through its United States Company-
Controlled distribution channel. The Company’s SLEEP NUMBER Bedding Collection offers a line of
products. In January 2013, the Company acquired Comfortaire Corp. Select Comfort Corporation poses a
threat to Bed Bath & Beyond considering the possibility of a partnership taking place with a competitor
such as Williams-Sonoma and their ability to expand into the domestics merchandise market, taking away
market share from Bed Bath & Beyond.
Williams-Sonoma Inc. (NYSE: WSM) – Market Capitalization: $5.9 billion
Arguably one of Bed Bath & Beyond’s strongest competitors due to
their size, appeal, and related home furnishing focus, Williams-Sonoma, Inc. is
a multi-channel specialty retailer of products for the home. The Company is an
e- commerce retailer with brands in home furnishings. It operates retail stores
in the United States, Canada and Puerto Rico, and franchises its brands to a third party in a number of
countries in the Middle East, including Bahrain, the Kingdom of Saudi Arabia, Kuwait and the United
Arab Emirates. Its products are also available to customers through its catalogs and online worldwide.
The Company operates in two segments: direct-to-customer and retail. The direct-to-customer segment
has seven merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West
Elm, Rejuvenation and Mark and Graham) which sell its products through its seven e-commerce Websites
and eight direct-mail catalogs. The retail segment has five merchandising concepts (Williams-Sonoma,
Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation) which sell products through its retail
stores.
Home Depot Inc. (NYSE: HD) – Market Capitalization: $119.6 billion
The Home Depot, Inc. (The Home Depot) is a home improvement
retailer. The Company operates The Home Depot stores, which are full-service,
warehouse-style stores. The Home Depot stores sell an assortment of building
materials, home improvement and lawn and garden products and provide a
number of services. The Home Depot stores average approximately 104,000
square feet of enclosed space, with approximately 24,000 additional square feet
of outside garden area. The Home Depot stores serve three primary customer
groups: do-it-yourself (D-I-Y) customers, do-it-for-me (D-I-F-M) customers
and professional customers. In February 2013, it acquired Measurecomp LLC
and HD Components LLC. In January 2014, Home Depot Inc. acquired Blinds.com. Clearly, Home
Depot’s acquisitions, specifically with Blinds.com, validate Home Depot’s direction into the home
furnishing retail sub-industry. Moreover, Home Depot’s large size, extensive customer base, and
consequential resource enable them to pursue international expansion and strategic
acquisitions/partnerships, which could pose a threat to Bed Bath & Beyond.
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Lowe’s Companies. (NYSE: LOW) – Market Capitalization: $50.7 billion
Lowe’s Companies, Inc. (Lowe’s) is a home improvement retailer. As
of February 3, 2012, Lowe’s operated 1,745 stores, consisted of 1,712 stores
across 50 United States, 31 stores in Canada and two stores in Mexico. Its
1,745 stores represent approximately 197 million square feet of retail selling
space. The Company serves homeowners, renters and commercial business
customers. Individual homeowners and renters complete an array of projects and vary along the spectrum
of do-it-yourself (DIY) and do-it-for-me (DIFM). Commercial business customers include those who
work in construction, repair/remodel, commercial and residential property management, or business
maintenance professions. During the fiscal year ended February 3, 2012 (fiscal 2011), it opened 25 stores,
which included the relocation of two existing stores. Seven of the stores were opened in Canada. In
August 2013, the Company acquired the majority of assets of Orchard Supply Hardware, including 72
Orchard stores. Lowe’s large size and consequential resource enable them to pursue international
expansion and strategic acquisitions/partnerships, which could pose a threat to Bed Bath & Beyond.
ATGStores.com, a Lowe’s company as of 2011, is a giant e-commerce company that operates over 500
“online stores” or websites in niche markets including home furnishing and improvement. More than
simply selling a wide range of home-related products through its online stores, ATGStores.com recently
developed a “Learning Lounge” - an online library of home improvement tips, tricks and how-to videos
that cover everything from ceiling fan installation to buyer's guides for birdhouses – and can be seen as a
viable competitor with Bed Bath & Beyond.
Sears Hometown and Outlet Stores Inc. (NASDAQ: SHOS) – Market Capitalization: $334.5 million
Sears Hometown and Outlet Stores, Inc. (SHO) is a retailer primarily
focused on selling home appliances, hardware, tools and lawn and garden
equipment. As of April 28, 2012, the Company and its dealers and franchisees
operated 1,238 stores across all 50 states and Puerto Rico, Guam and Bermuda.
The Company also provides its customers with a range of services, including home delivery and
installation and product protection agreements. SHOS operates in two segments: the Sears Hometown and
Hardware segment and the Sears Outlet segment. As of April 28, 2012, the Sears Hometown and
Hardware segment consists of 944 Sears Hometown Stores, 96 Sears Hardware Stores and 76 Sears
Home Appliance Showrooms. Sears Hometown and Outlet Stores poses a threat to Bed Bath & Beyond
considering their close relationship with Sears Holding Corporation, being spun off in 2012, provides
them many strategic advantages and thus enables pursuit of international expansion and strategic
acquisitions/partnerships despite their small size.
Tile Shop Holdings Inc. (NASDAQ: TTS) – Market Capitalization: $438.7 million
Tile Shop Holdings, Inc. is a specialty retailer of manufactured and
natural stone tiles, setting and maintenance materials, and related accessories in
the United States. The Company sells over 4,500 products from around the
world, including ceramic, porcelain, glass, and stainless steel manufactured
tiles and, marble, granite, quartz, sandstone, travertine, slate, and onyx natural tiles. It purchases its tile
products and accessories directly from producers. The Company manufactures its own setting and
maintenance materials, such as thinset, grout, and sealers under its brand name. The Company operates 88
stores in 28 states, with an average size of 23,000 square feet. It also sells its products on its Website. In
January 2014 Tile Shop Holdings Inc. launched its first retail store in Oklahoma City. Tile Shop
Holdings, due to its already established internal manufacturing process, has the capability widening their
footprint within the home appliance market and vertically integrating their business expansion at the same
time, which could pose a threat to Bed Bath & Beyond.
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Threat of New Entrants – Moderate
The specialty retail industry, specifically the home furnishing sub-industry does not pose any
extensive barriers to entry in terms of patents and legal conduct, yet due to the high capital requirements
involved in leasing and owning the physical retail stores (Bed Bath & Beyond operates 1,507 retail
locations) and distribution facilities (Bed Bath & Beyond operates 14 distribution facilities) as well as in
supporting high-quality, customer service-oriented employees (Bed Bath & Beyond employees 58,000
full-time and part-time people), there is a moderate threat level of new entrants in the home furnishing
industry. Additionally, the home furnishing industry profitability is not generally thought of as on par
with that of volatile yet high-risk, high-reward industries such as technology, which helps limit the
number of new entrants. Lastly, brand equity and customer loyalty play a large role in this segment as
consumers prefer to populate their homes with products from reputable, respectable, and well-known
companies, which also helps mitigate the threat of new entrants.
Threat of Substitute Products or Services – High
While the threat of substitute products or services is low considering that do-it-yourself (DIY),
despite the many available resources such as Houzz, ATGStores.com, and DIY ready, home furnishing
products are a time waste, typically lower quality, and are the only genuine alternatives to the home
furnishing industry in a traditional sense, the buyer’s ability to purchase similar items at similar prices
from a large number of companies (considering e-commerce) allows the threat of substitute products or
services to be of high severity. Moreover, non-specialized retailers such as Walmart and Target, discount
and mass merchandise retailers, and online only retailers potentially sell a large majority of comparable
products. Switching costs are moderate, however, as home furnishing items and accessories are best
purchased from one source at one time to ensure consistency and suitability. Nonetheless, home
furnishing products, due to their somewhat commoditized nature, increase the buyer’s propensity to
search for the best available deals and potential substitutes.
Bargaining Power of Customers – High
The vast array of substitute products within the home furnishing sub- industry provides customers
with a high degree of bargaining power. Moreover, home-related product purchases are generally faced
with high buyer price sensitivity and a consequential race to the bottom in terms of industry pricing.
Extensive information is available regarding home furnishing products, which can be found online (i.e.
review sites, blogs, white pages.) and people familiar with the products, which further increases the
bargaining power of customers.
Bargaining Power of Suppliers – Low
The bargaining power of suppliers is very low for Bed Bath & Beyond considering that in fiscal
2013, the Company purchased its merchandise from approximately 8,300 suppliers with the Company’s
largest supplier accounting for approximately 5% of the Company’s merchandise purchases and the
Company’s 10 largest suppliers accounting for approximately 17% of such purchases. With this in mind,
the volatile international economic environment is of little concern to Bed Bath & Beyond since the
Company purchases substantially all of its merchandise in the United States, the majority from domestic
sources and the remaining products directly from overseas sources. On top of that, the Company has no
long term contracts for the purchase of merchandise. From the Company’s perspective, “the Company
PORTER’S FIVE FORCES
20 | P a g e
believes that most merchandise, other than brand name goods, is available from a variety of sources and
that most brand name goods can be replaced with comparable merchandise,” demonstrating Bed Bath &
Beyond’s upper-hand in the relationship.
Intensity of Competitive Rivalry – High
Intensity of competitive rivalry within the specialty retail industry and home furnishing sub-
industry is high. The fragmented and innovative environment within which Bed Bath & Beyond operates
includes retail stores that sell many or most of the same products such as omnichannel retailers,
department stores, specialty stores, discount and mass merchandise stores, national chains and online and
multi-channel retailers. While many of these competitors carry many of the same product lines as Bed
Bath & Beyond, they do not typically offer the same brad and depth of products.
Considering Bed Bath & Beyond’s involvement within the consumer discretionary sector, and
specifically as a home furnishing retailer, the Company’s potential investment risks are as follows:
General economic factors beyond the Company’s control and changes in the economic
climate.
o Due to the Company’s high correlation (beta: 0.959) with the S&P 1500, any serious
changes in general economic factors have the ability to also affect the retail environment,
influence consumer spending, and thus Bed Bath & Beyond’s growth prospects.
Economic factors that are susceptible to market movements include: the housing markets,
recession, inflation, deflation, consumer credit availability, consumer debt levels, fuel
and energy costs, interest rates, tax rates and policy, unemployment trends, the impact of
natural disasters, civil disturbances and terrorist activities.
Emerging technologies as well as unanticipated changes in the pricing and other practices of
competitors.
o The retail business is highly competitive. The Company competes for customers,
employees, locations, merchandise, technology, services and other important aspects of
the business with many other local, regional and national retailers. Specifically, rapidly
evolving technologies are altering the manner in which the Company and its competitors
communicate and transact with customers. The Company’s execution of its own
omnichannel, multi-channel retailing, strategy in order to adapt to these changes, in
relation to its competitors’ actions as well as to its customers adoption of new
technology, presents a specific risk. Further risk is involved in unanticipated changes in
the pricing and other practices of the Company’s competitors, including promotional
activity and rapid price fluctuation enabled by technology.
The Company’s failure to anticipate and respond in a timely fashion to changes in
consumer preferences and demographic factors.
o The Company’s failure to anticipate, identify or react appropriately to changes in
customer tastes, preferences, shopping and spending patterns and other lifestyle decisions
could lead to, among other things, excess inventories or a shortage of products.
RISKS
21 | P a g e
Unusual weather patterns.
o Consumer spending and company performance may be impacted by weather related
factors including, but not limited to: frequent or unusually heavy snow, ice or rain storms,
hurricanes, floods, tornados or extended periods of unseasonable temperatures.
A major disruption of the Company’s information technology systems.
o The Company’s operating results could be negatively impacted by a major disruption (i.e.
power outages, computer viruses, telecommunication failures, security breaches and other
catastrophic events) of the Company’s information technology systems. The Company
relies heavily on these systems to process transactions, manage inventory replenishment,
summarize results and control distribution of products.
Lack of supplier adherence to laws and/or standards might impact Company’s reputation.
o The Company purchases a majority of its merchandise from suppliers in the United States
and the small remaining portion directly from overseas sources. Lack of adherence on
behalf of one of the Company’s domestic or foreign suppliers with regards to labor,
environmental, health and safety laws and standards could negatively impact the
Company’s reputation.
Present and future business acquisitions.
o Despite the Company’s careful evaluation and planning for the integration of newly
acquired businesses, acquiring a company carries inherent risks including: loss of key
personnel, undisclosed or subsequently arising liabilities; challenges in the successful
integration of operations, aligning standards, policies and systems; and inefficient
allocation of management resources in order to mitigate integration issues.
The Company’s ability to open new stores, develop its omnichannel capabilities and operate
profitably.
o Due to the Company’s success relying, in part, on their ability to generate additional
revenue through opening new stores and developing its omnichannel
capabilities/platform, the Company’s performance might adversely be affected by sub-
optimal/inadequate: identification and availability of suitable store locations, negotiation
of leases, hiring and training of skilled store operating personnel (management), and
timely development of new stores, including the availability of construction materials and
labor and the absence of significant construction and other delays in store openings based
on weather or other events. The Company’s ability to develop its omnichannel
capabilities will depend on a number of factors, including its assessment and
implementation of changing technologies, which increases the cost of doing business.
Changes in statutory, regulatory, and other financial/legal requirements (i.e. accounting
rules, regulations, and tax laws) at a local, state or provincial and national level.
o Changes in the financial/legal landscape will result in compliance costs as well as the
possibility of government penalties and litigation in the event of deemed noncompliance.
Changes in the legal/financial landscape can take shape with regards to: product safety,
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environmental protection, privacy and information security, wage and hour laws, tax
rates, federally insured limits, etc.
The valuation developed for Bed Bath & Beyond incorporates the income approach with a
corresponding discounted cash flow analysis as well as the market approach with a corresponding relative
valuation utilizing comparable companies. Since a company is only worth what the market is willing to
pay for it, the ultimate target price is an integration of the relative valuation, at a 50% weight, and
discounted cash flow analysis, 50% weight. After determining a relative valuation price of $88.54 and a
discounted cash flow analysis price of $79.26, I applied the aforementioned weights and derived an my
ultimate target price of $83.90, which implies a 24.6% premium to the current price of Bed Bath &
Beyond at $67.34 as of 11/01/14. The target price was generated from the following relative valuation and
discounted cash flow assumptions and calculations, which will be explained in that order.
Relative Valuation
The relative valuation incorporated comparable companies operating specifically within
the home furnishing sub-industry in which Bed Bath & Beyond competes, as well as companies
operating within the home improvement sub-industry, which both fall under the specialty retail
industry and consumer discretionary sector. The home furnishing sub-industry, a $21.6 billion
sub-industry, is comprised of nine companies, one being Bed Bath & Beyond, and the other eight
being Aaron’s Inc., Haverty Furniture Companies, Kirkland’s Inc., Mattress Firm Holding Corp.,
Pier 1 Imports Inc., Restoration Hardware Holdings Inc., Select Comfort Corp., and Williams
Sonoma Inc. This portion of the relative valuation compares all of the aforementioned companies
using EV/EBITDA (TTM), P/E (TTM), P/E (Forward), and PEG multiples, which are commonly
utilized multiples in the specialty retail industry and were all given equal weight based on the
mean rather than the median. The home furnishing sub-industry comparables above were
weighted at 90% of the average implied share price.
Due to the interrelatedness of the specialty retail industry, and specifically the close
relationship of the home furnishing and home improvement, the home improvement sub-industry
was weighted at 10% of the average implied share price. The home improvement sub-industry is
VALUATION
23 | P a g e
a $174.9 billion sub-industry, which is comprised of five companies including Home Depot Inc.,
Lowe’s Companies Inc., Lumber Liquidators Holdings Inc., Sears Hometown and Outlet Stores
Inc., and the Tile Shop Holdings Inc., which were all compared and assessed, except Lumber
Liquidator Holdings Inc. due to its very different core business operations and product offerings,
in the relative valuation. This portion of the relative valuation compares all of the aforementioned
companies, beside Lumber Liquidators Holdings Inc., using EV/EBITDA (TTM), P/E (TTM),
P/E (Forward), and PEG multiples, which are commonly utilized multiples in the specialty retail
industry and were all given equal weight based on the mean and rather than the median. Since
Bed Bath & Beyond makes up over 54% of the home furnishing sub-industry, constricting the
number of comparable companies based on fundamentals such as market capitalization was
deemed an irrational, inapplicable, and unrealistic approach, thus resulting in a comprehensive
and elaborate relative valuation.
The relative valuation yielded an average implied share price of $88.54, which offers an
implied premium of 31.48% to the current $67.34 share price of Bed Bath & Beyond as of
11/01/14.
(Refer to Relative Valuation Table on page 24)
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Weighted Average Cost of Capital (WACC)
The discounted cash flow analysis was calculated by projecting the present value of Bed Bath &
Beyond’s unlevered free cash flow (Cash Flow from Operations + Investment in Working Capital +
Investment in Property, Plant & Equipment) for the next five years (2015 – 2019) and adding this
discounted cash stream to an ultimate discounted terminal value in 2019, equating to the enterprise value
of the company. The market value of the Company is derived by taking the enterprise value and adding
back the cash & cash equivalents and deducting the book value of debt. In discounting the unlevered free
cash flow for 2015 – 2019, a weighted average cost of capital (WACC) otherwise known as a required
rate of return was calculated, as shown below.
The WACC calculation is determined by adding the cost of preferred equity to the cost of debt
and the cost of equity. In the case of Bed Bath & Beyond’s cost of preferred equity, since there was no
preferred equity outstanding, there was no associated cost. With regard to the cost of debt, the Company
issued three series of unsecured senior notes totaling $1.5 billion on July 15, 2014. The three series of
debt are broken out as following: $300 million issued at 3.749% maturing in 2024, $300 million issued at
4.915% maturing in 2034, and $900 million issued at 5.165% maturing in 2044. After calculating a
weighted cost of debt for Bed Bath & Beyond’s only outstanding debt to date ($1.5 billion), a 3.00%
after-tax cost of debt was calculated, which factors in the interest tax shield. With regard to the
Company’s cost of equity (9.0%), a capital asset pricing model was utilized and calculated as follows:
25 | P a g e
Market risk premium: Applied a conservative market risk premium of 7.0%
Beta: Applied a weighted average of six adjusted betas – two of which were personally
obtained by running a regression analysis and comparing the relationship of the daily and
weekly holding period returns of Bed Bath & Beyond to the GSPC (S&P 500 index). The
four remaining beta results were calculated using Bloomberg – two of which were
obtained by comparing the daily and weekly holding period returns of Bed Bath &
Beyond to the SPR (S&P 1500 index) and two of which were obtained by comparing the
daily and weekly holding period returns of Bed Bath & Beyond to the SPX (S&P 500
index). Bloomberg provided adjusted as well as raw beta figures, yet for the two
personally calculated beta figures, an adjusted beta was calculated based on the following
information.
o The adjusted beta is an estimate of a security's future Beta. Adjusted Beta is
initially derived from historical data, but modified by the assumption that a
security's true Beta will move towards the market average, of 1, over time. The
formula used to adjust Beta is: (0.67) x Raw Beta + (0.33) x 1.0
Source: Bloomberg
Risk Free Rate: The risk free rate at 2.21% is applied in relation to the rate, as of
11/01/14, on a 10 year treasury note.
Bloomberg: Bloomberg’s cost of equity is 9.0%, which was averaged with the personally
calculated cost of equity at 9.0% as well.
Ultimately, the weighted average cost of capital was derived by averaging Bloomberg’s WACC
(8.2%) with the personally calculated WACC (8.3%), which took into account the current capital
structure of Bed Bath & Beyond at 89.1% equity considering a market capitalization of $11.5 billion and
10.9% debt considering debt amounted to its $1.5 billion long-term notes, with no short-term debt to
speak of, resulting in an averaged and implemented weighted average cost of capital of 8.26%.
(Refer to WACC Calculation on page 26)
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Discounted Cash Flow Analysis
27 | P a g e
Discounted Cash Flow Analysis – Cash Flow Drivers
Scenario1’s (Base Case)
revenue growth at 6.5% is
averaged with the analyst
estimates of 3.65% over
the next year to derive at
an incorporated revenue
growth rate for the DCF
Analysis of 5.065% over
2015 – 2019, which
contributes 50% to the
ultimate share price of the
Company.
28 | P a g e
Assumptions/Drivers of the Discounted Cash Flow Analysis:
o DCF Weighting: Scenario 1’s revenue growth assumption at 6.5% for the next five years, which
is more than 20% less than the historical average, is a conservative estimate and safe assumption
especially considering the future growth prospects ahead such as store development, omnichannel
retailing, share repurchasing program, and international expansion. Nonetheless, analysts estimate
revenue growth to be 3.63% over the next year. With this in mind, I decided to average the 6.5%
revenue growth assumption (which is 20% discounted based off historical performance) and the
3.63% revenue growth based off analyst estimates to equal an implemented revenue growth rate
of 5.065%. The DCF Analysis portion contributes to 50% of the ultimate target share price for the
Company.
o Revenue Growth: The compounded annual growth rate of Bed Bath & Beyond’s revenue
throughout the last seven years between 2007 – 2014 has been 8.2%, which includes the
recession of ’08 - ‘09. Considering Scenario 1’s assumption at 6.5% revenue growth for
the next five years, which is more than 20% less than the historical average, this is a
conservative estimate and safe assumption especially considering the future growth
prospects ahead such as store development, omnichannel retailing, share repurchasing
program, and international expansion. Nonetheless, analysts estimate revenue growth to
be 3.63% over the next year. With this in mind, I decided to average the 6.5% revenue
growth assumption (which is 20% discounted based off historical performance) and the
3.63% revenue growth based off analyst estimates to equal an implemented revenue
growth rate of 5.065%. I believe revenue growth at 6.5% over the next three years is
achievable given the domestic 1,300 store development agenda, international expansion
opportunities, and increased online sales. With this in mind, “currently, about 3% of Bed
Bath & Beyond's revenue is created from e-commerce and online sales of furniture and
home furnishing products is expected to rise from $17.7 billion in 2012 to $31 billion in
2016. In the same period, health and personal care sales are expected to increase from
$11 billion to $19 billion. All these are industries in which Bed Bath & Beyond thrives.
As a result, Canaccord Financial believes that Bed Bath & Beyond can increase its e-
commerce revenue to 10% of total revenue by the end of fiscal 2015.” Clearly, while Bed
Bath & Beyond is a value play more so than the embodiment of a growth story, the
market is undervaluing the Company’s digital business and ability to compete with online
retailers.
o COGS (% of Revenue): The projected cost of goods sold at 59.28% of revenue was determined
calculating a weighted average of the cost of goods sold as a percentage of revenue during the
five previous years 2010 – 2014 as noted in the Key Cash Flow Drivers table above. In year 2015,
COGS was projected at the Company’s historical average 59.28% of revenue and each year
forward the COGS as a percentage of revenue increases by .5% to conservatively account for
potential material and other related costs, ending year 2019 with a COGS at 60.47% of revenue.
o SG&A (% of Revenue): The projected selling, general, and administrative costs at 26.17% of
revenue was determined calculating a weighted average of the selling, general, and
administrative costs as a percentage of revenue during the five previous years 2010 – 2014 as
noted in the Key Cash Flow Drivers table above. In year 2015, SG&A was projected at the
Company’s historical average 26.17% of revenue and each year forward the SG&A as a
percentage of revenue increases by .5% to conservatively account for potential labor and other
related costs, ending year 2019 with SG&A at 26.69 % of revenue.
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o Depreciation, Depletion, & Amortization (% of Revenue): The projected depreciation, depletion,
& amortization costs at 2.01% of revenue was determined calculating a weighted average of the
depreciation, depletion, & amortization costs as a percentage of revenue during the five previous
years 2010 – 2014 as noted in the Key Cash Flow Drivers table above. In year 2015, depreciation,
depletion, & amortization costs were projected at the Company’s historical average 2.01% of
revenue, which is held consistent each year forward through 2019 as there are no identified
reasons to assume otherwise.
o Minority Interests (% of Revenue): The projected minority interests at 0.00% of revenue was
determined calculating a weighted average of the minority interests as a percentage of revenue
during the five previous years 2010 – 2014 as noted in the Key Cash Flow Drivers table above. In
year 2015, minority interests were projected at the Company’s historical average 0.00% of
revenue and held consistent for each year forward until 2019 as there are no identified reasons to
assume otherwise.
o Tax Rate (% of Revenue): The projected tax rate at 37.96% of revenue was determined calculating
a weighted average of the tax rate as a percentage of revenue during the five previous years 2010
– 2014 as noted in the Key Cash Flow Drivers table above. In year 2015, the tax rate was
projected at the Company’s historical average 37.96% of revenue, which is held consistent each
year forward through 2019 as there are no identified reasons to assume otherwise.
o Net Working Capital (% of Revenue): The projected cost of goods sold at 10.84% of revenue was
determined calculating a weighted average of the net working capital as a percentage of revenue
during the five previous years 2010 – 2014 as noted in the Key Cash Flow Drivers table above. In
year 2015, COGS was projected at the Company’s historical average 10.84% of revenue and each
year forward the net working capital as a percentage of revenue increases by .5% to
conservatively account for a potential increased requirement to hold more inventory and other
current assets. In year 2019, the net working capital as a percentage of revenue totals 11.05% of
revenue.
o Capital Expenditures (% of Revenue): The projected capital expenditures at 2.45% of revenue
was determined calculating a weighted average of the capital expenditures as a percentage of
revenue during the five previous years 2010 – 2014 as noted in the Key Cash Flow Drivers table
above. In year 2015, capital expenditures was projected at the Company’s historical average
2.45% of revenue and each year forward the capital expenditures as a percentage of revenue
increases by .5% to conservatively account for a potential increased investment in new store
locations, omnichannel platforms, and international expansion. In year 2019, the capital
expenditures as a percentage of revenue totals 2.50% of revenue.
o Discount Factor: Midyear convention is implemented in discounting the unlevered FCFOA to
better account for the current time period (November) and the fact that we are halfway through
the first year of the DCF analysis.
o Terminal Growth: Terminal growth rate at year 2019 is set at the standard-practice 3.0%.
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Bed Bath & Beyond Company Website
Quarterly and Annual Statements (Form 10-Q, Form 8-K, Form 10-K)
Bloomberg
Morningstar
Schwab
Yahoo Finance
Global Newswire
MarketWatch
U.S. Bureau of Labor Statistics | Division of Labor Force Statistics
Commerce Department
Freddie Mac
Fannie Mae
Bureau of Economic Analysis
New York Federal Reserve Quarterly Report on Household Debt and Credit
The Conference Board
o Sensitivity Analysis #1 takes COGS and SG&A into consideration over the next five
years on the premise that the WACC remains 8.26% and revenue growth averages
5.065%.
SOURCES
EXHIBITS
79.26 57.5% 58.0% 58.5% 60.0% 60.5% 61.0%
25.0% $105.5 $101.0 $96.6 $83.2 $78.7 $74.3
25.5% $101.0 $96.6 $92.1 $78.7 $74.3 $69.8
26.0% $96.6 $92.1 $87.7 $74.3 $69.8 $65.4
27.0% $87.7 $83.2 $78.7 $65.4 $60.9 $56.5
27.5% $83.2 $78.7 $74.3 $60.9 $56.5 $52.0
28.0% $78.7 $74.3 $69.8 $56.5 $52.0 $47.5
Sensitivty Anlaysis #1
SG
&A
(%
of
Re
ve
nu
e)
Average COGS (% of Revenue) from 2015 - 2019
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o Sensitivity Analysis #2 takes Revenue Growth and WACC into consideration over
the next five years on the premise that the other key cash flow drivers remain
unchanged.
S
Source: Schwab
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For 3Q ’15, scheduled for December 17, 2014, analysts estimate BBBY will earn $1.19
non-GAAP per share, an increase of 6.28% over the prior year quarter non-GAAP results.
Source: Schwab
For 3Q ’15, scheduled for January 8, 2015, analysts estimate BBBY will generate
revenues of $3.0 billion, an increase of 3.5% over the prior year third quarter results.
BBBY has increased revenue 9.8% on an annualized five year growth rate basis.
Stock Price Performance Graph
Source: Bed Bath & Beyond 2014 Form 10-K
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The graph shown above compares the performance of the Company’s common stock with
that of the S&P 500 Index, the S&P Specialty Retail Index and the S&P Retail Composite
Index over the same period (assuming the investment of $100 in the Company’s common
stock and each of the three Indexes on February 28, 2009, and the reinvestment of
dividends, if any).
Source: S&P Capital IQ
Bed Bath & Beyond’s historical financial performance is
unparalleled - the Company’s revenue, net income margin,
return on assets, and return on equity increased each year from
2005-2014, except for fiscal 2009 (February ’09) margins,
despite the tough, unfavorable macro-economic landscape.
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Revenue Estimates
Source: Schwab
Source: Energy Information Administration
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Source: Schwab
Financial Statements
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