As I run the numbers of Bed Bath & Beyond (NASDAQ: BBBY) first-quarter earnings, investors will notice a pattern, and it’s a really bad one. This business is basically yesterday’s news, and there are plenty of reasons why … and why to sell it now.
Quarterly sales rose 3% to $2.73 billion, an increase from $2.67 billion in last year’s same quarter. We always want to check same-store sales, however, so we don’t get fooled by even middling numbers like these. Sure enough, same-store sales only rose 2.2%, up from last year’s 0.4%. A business doing 2% same-store numbers is a flagging business.
For anyone who thinks they can take solace that Bed Bath & Beyond earnings of $0.93 per share at least came in flat, instead of down, they’d better look again. Like many other companies, EPS is being financially engineered through the use of buybacks.
That’s why we look at net income, and that’s where the news is awful. There was a 19% net income decline, from $187 million to $158 million. Operating cash flow dropped from $183 million to $153 million, and free cash cratered from $116 million to $81 million.
At times like this, you want management to come up with some grand new vision and reboot the brand. Instead, they made a huge bond offering last year to the tune of $1.5 billion and funneled it into buying back stock. I never like this kind of move. It costs shareholders real money for the bond offering, and it’s used to artificially inflate the stock price.
Management will crow about it being a good use of capital. I disagree. With about $800 million in cash on the books, I’d rather see a dividend.
But back to the core problem: the company is facing major changes in how people shop. Superstores like this one were expanding for many years and killing competition. Except certain retail businesses like this now have Internet competition from Amazon.com (NASDAQ: AMZN). You can buy all the same things for much less.
See, Bed Bath & Beyond is to home retailing what Whole Foods Market (NASDAQ: WFM) is to shopping, and what Nordstrom (NYSE: JWN) is to clothing retailers. They are for wealthier people. What has happened, however, is that even rich people are realizing they can get the same things cheaper online – or, in this case, at mid-level store retailers.
So the salad days for this company are far behind it, and management doesn’t want to try and revamp the business. They took the easy way out.
How does this affect investors? Well, the stock is being artificially inflated while real EPS is falling, if you look at net income. So the market is valuing the company at about 14 times earnings, when earnings are actually declining.
Were this a big dividend stock, you might have a reason to buy it, but it isn’t. Instead, you are paying a ridiculous valuation for a company whose net income is declining.
So don’t pay anything for it. Sell it and move on.
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