Bed Bath and Beyond (BBBY)

  • Revenue per share is up $33/share in 2011 to $63/share in 2015
  • ROE is up from 20.85% to 28%
  • Gross Margins are down from 41% to 38%
  • EPS is up from 3.07 to 5.07
  • BBBY has been gobbling up its own shares reducing shares outstanding by 70M shares from 2011 to 2015 reducing shares outstanding from 258M to 188M
  • $6.3B shares re-purchased in last five years
  • Shares are trading at an earnings yield of 7%
  • Company does not give guidance
  • Strong cash position of $875M and net debt of $650M
  • FCF of $4.5B in last five years and $900M in last 12 months
  • Strong management team with share holder orientation

The most important question under the circumstances to ask is: what’s the catch? What can go wrong?

2010 2011 2012 2013 2014
EPS 3.07 4.06 4.56 4.79 5.07
EPS Growth 32.2% 12.3% 5.0% 5.8%
Shares Outstanding 258 244 228 213 189
% Change -5.4% -6.6% -6.6% -11.3%

If you look carefully at the above table, one can spot a potential problem. EPS growth is lower than the rate at which the shares outstanding have been declining. While it is great that the company is returning money back to the shareholders, the underlying business is losing it strength. Over the last 2 years, while shares outstanding have declined 6.6% and 11.3% and net income has risen only 5.0% and 5.8%.

To understand this better, look the below chart to see what happens to EPS when shares outstanding change.

2010 2011 2012 2013 2014
Theoretical shares outstanding 100 94.6 88.4 82.6 73.3
Net Income 100 100 100 100 100
EPS 1.00 1.06 1.13 1.21 1.37
EPS Growth 5.7% 7.0% 7.0% 12.7%

Essentially the underlying EPS growth on the base business has been trending negative for the last 24 months and essentially one is buying a negative EPS growth business goosed up by buybacks at 13 times earnings when one buys BBBY. The primary reason can be attributed to the high gross margins that the company makes at 38% in 2014 as against its chief competition online where it is significantly lower. As the online business for BBBY grows and due to competition, one can expect the underlying EPS to come further down over the next few years. While the strong cash generation and the buyback will probably put a floor on the stock and goose up EPS further, it might be worthwhile to look at it from the sidelines and participate with long term compounding machines instead unless it gets very cheap from here.

Disclosure: No position