By Alexander Eule
Given that it's 2014, Bed Bath & Beyond has probably been
overreaching with its name.
For two decades, the retailer has essentially ignored the
Internet. Only recently has the company begun to think beyond the
confines of its 1,500 stores.
In the latest quarter, Bed Bath's e-commerce sales soared by
50%. The Web now comprises 5% to 6% of sales, estimates Barclays
analyst Alan Rifkin.
"They are significantly accelerating the portion of [capital
expenditures] devoted to e-commerce," says Mr. Rifkin, who has
covered the company for 20 years. "They have four times the number
of people working on IT today that they did four or five years
ago."
Even so, the stock continues to be valued like that of a fading
retailer. The shares are down 8.5% in 2014, and trade at a
below-market 13.6 times forward earnings.
Just five of the 23 analysts surveyed by FactSet rate the stock
a Buy.
Contrarians can find opportunity in the doubt. In its recent
deal for PetSmart (PETM), another old-school retailer,
private-equity firm BC Partners paid nine times earnings before
interest, taxes, depreciation, and amortization.
At a similar multiple, Bed Bath & Beyond would be worth $87
a share--19% above a recent price of $73.
Bed Bath (BBBY), which sells goods ranging from coffee makers to
linens to pots and pans, is thinking more about shareholders of
late. In July, the company raised $1.5 billion through its first
debt offering in 19 years. The money mainly was used to fund a
stock buyback.
Taking on the Internet remains the company's greatest
opportunity--and challenge.
"For a few years now, a lot of investors have viewed them as a
natural victim of Amazon.com (AMZN)," says Marc Riddick, an analyst
at Williams Capital. "Bed Bath & Beyond is in the midst of not
just fighting back, but really, Amazon is accelerating the pace of
their evolution."
Other traditional retailers have already proved that online
sales can be good business. Roughly half of all Williams-Sonoma
(WSM) sales now come from the Web, and Barclays' Mr. Rifkin notes
that the operating margin online is 13 percentage points better
than in the stores.
For now, Bed Bath's evolution is damping profits. For the
current fiscal year, net income is likely to fall 6.8%, to $953
million, even as sales rise.
The good news for Bed Bath & Beyond is that it's starting
from a more profitable point than some of its peers, with a recent
operating profit margin of 14%. A regular stream of 20%-off coupons
means that prices are often competitive with Amazon's.
In addition, Bed Bath & Beyond continues to offer investors
something that Amazon just can't seem to match--a regular stream of
quarterly profits.
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