Bed Bath & Beyond(Nasdaq: BBBY)

An Analysis and Valuation of Bed Bath & Beyond

By James Cullen, for Wall St. NewslettersOriginally Released January 3rd, 2008Made Public January 23rd, 2008

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Foreword

Numerous economists, market forecasters, politicians and othershave weighed in on the odds of a recession in the US - that is, adecline in GDP for two or more consecutive quarters. Whether ornot a recession occurs, or is already underway, is a matter of purespeculation. Attentions should be focused on prudent investmentsand not on divining economic data.There are two approaches frequently advocated in difficult eco-nomic times. The first revolves around chasing growth stocks underthe thesis that, as fewer companies grow quickly, those that do willbe better rewarded by the market as a whole. The second favorspredictable, stable companies - conglomerates, consumer staples,and general blue chip, mega-cap names.Both methods have their place. Certain growth names will performwell, with the obvious caveat that the growth must be for real. Toooften, however, I find the growth stories have a high degree of un-predictability, and the stocks are not be cheap. Dogs may chase,but prudent investors should not.With the second strategy, it is difficult to argue against names likeCoca-Cola (KO) or Proctor & Gamble (PG) given their enormouseconomic moats. The stocks, however, simply aren’t cheap at atime like this - both trade around 20x EV/OCF. Still, the idea of buying a consistently high-performing company at a reasonableprice should be particularly appealing at a time like this.I will argue that the company in this report may be the most con-sistent high-performer of the last decade, although it trades at lessthan 60% of the valuation of more well-known firms that areknown as “recession stocks.”

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Consistency of Operations

The market as a whole tends to reward companies with highly pre-dictable operating results. As I mentioned earlier, most mega-capstaples companies (i.e. PG, CL, KO, PEP, MCD) tend to trade atabout 25x earnings and 20x operating cash flows. BBBY, on theother hand, trades around 13x earnings and 11x operating cashflows. On the surface, this comparison may seem fairly ridiculous:yes, BBB does have a store base nearing 1,000, but it is still hasnowhere near the ubiquity of the aforementioned examples - some-thing I’ll readily acknowledge. At the same time, consider the com-parable performance data over the last decade:Bed Bath & Beyond has continually maintained gross margins in thelow 40% range; standard deviation is 0.70%, lowest of the groupabove on both a gross and adjusted (coefficient of variation) basis.

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Gross Margins over Time