Barron’s: BBBY Could Fetch $85 per Share

This weekend, Barron’s highlighted Buy List member Bed Bath & Beyond ($BBBY). I was pleased to see them mention many of things we like about BBBY. The only awkward note was that the article presented the company as an ideal stock for Warren Buffett. That really seemed out of the blue and felt tacked on in order to draw reader interest.

Bed Bath has had no direct competition since Linens ‘n Things was liquidated in 2008 after a bankruptcy. It controls an estimated 25% of the domestic home-furnishings market. Department stores offer limited competition because clothing generally generates higher profits per square foot of selling space than housewares.

Bed Bath’s strategy is unlike any other major retailer’s. It rarely advertises and usually avoids markdowns except on seasonal items, while providing excellent customer service. It targets customers with coupons offering a 20% discount, or $5 off, a single item (with a wide number of excluded products) to help drive traffic. As savvy shoppers know, Bed Bath & Beyond generally accepts expired coupons, and it’s known for a liberal returns policy–customers sometimes needn’t present a receipt. And they often present multiple coupons. The approach works because many customers come for a single item and leave with many, as they walk around the “racetrack” layout of the narrow-aisled stores.

(…)

Bed Bath’s store managers have considerable autonomy in merchandise selection. The company has no central distribution facilities; suppliers typically deliver directly to stores. Feinstein has called this “our uniquely decentralized culture.”

Barron’s said that BBBY “could” fetch $85 per share. Yes, I suppose it could, though I would have to think the odds are low. Still, any reasonable analysis indicates that this is a strong company going for a very fair price. The magazine also said that BBBY “could be the most financially conservative big retailer in the U.S.” (Again with “could”?) Consider that BBBY has zero dent and nearly $4 per share in cash. Thanks to buybacks, share count has dropped by 100 million to 226 million since 2004. I’m not a fan of buybacks, but at least they’re actually reducing the amount of shares.

Posted by Eddy Elfenbein on March 10th, 2013 at 10:05 pm

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