‘[The assignment is to evaluate whether share valuation of BBBY as of 8/8/94

(see exhibit 3) is reasonable, or undervalued, or somewhat overvalued, from the

viewpoint of:

• Its current strategy and recent performance

• Potential problems with sustaining this strategy and competitive

advantage To do this, you may consider the following “backwards recursion”

approach:

1. Use a quick (and dirty) valuation methodology, such as the growth perpetuity

formula, and information given in the case to “back out” investors’

expectations on earnings and book equity value growth.

2. Then evaluate how reasonable are these expectations? To do so, consider the

following:

a. Assess BBBY’s current performance, especially in relation to its

competitors. What are its competitive advantages that drive its superior

ROE to date?

b. Are the business, operating, and expansion strategies consistent with

each other? How sustainable are BBBY’s ROE and growth rate?

3. Next, analyze the effectiveness of BBBY’s plans to finance its expansion? What

potential problems are likely to be encountered as BBBY implements its

expansion plans? How does the current (August 1994) equity valuation relate

to the financing of BBBY’s expansion plans?

The paper should have an executive summary of no

You have evaluated the financial statements and other supporting materials in the case, and it is
time to make a decision on a rating to assign to BBBY stock. Perform financial statement analysis and
a strategic analysis of Bed Bath & Beyond. Assess the company’s business, operating, and expansion
strategies. What, if any, changes would you make to this strategy?

Assess the company’s performance. Utilizing your knowledge of financial ratios and financial
statement analysis, calculate and comment on growth and margins and evaluate BBBY’s
performance relative to its peers.
Is the Company’s growth strategy sustainable? Evaluate the Balance Sheet and Statement of Cash
Flows. Identify and adjust for any “off-balance sheet” financing impacts.

What are the major sources and uses of cash within the company?

Does BBBY have any sustainable competitive advantages?

What are the risks to its business?

In your opinion, is BBBY capable of financing its growth and expansion program for the remainder of
1994 and on into fiscal 1995?

Prepare a forecasted income statement and balance sheet for the company, identify the “drivers”
for your forecast including what in your opinion will have an impact on future earnings and cash
flows. You may want to consider various scenarios. What is your rating? Provide your justification
and any other observations.