Bed, Bath & Beyond earnings are above and beyond when it comes to quality
Forget those worrying retail sales data; Bed Bath & Beyond offers stellar earnings quality and its same-store sales are climbing.
Despite the fact that this week’s latest batch of U.S. retail sales data raised some questions about the health of consumer – or at least, the willingness of consumers to open their wallets and spend – the Thomson Reuters Same Store Sales Index managed to post a healthy 3.9% gain in May. And fears about the global economy notwithstanding, shoppers still appear willing to spend on new clothes for summer just as readily as they will fork over cash for back to school supplies for their children later this summer. One retailer that continues to do well is Bed Bath & Beyond (BBBY.O), where you can snap up everything from mainstream white goods like sheets and towels to the snazziest new kitchen gadgets and even (via buy buy BABY, the company’s chain of stores offering everything new parents need for their newborns and toddlers) a baby’s crib or a stroller. Best of all, if you’re an investor and not just a shopper, Bed Bath & Beyond is reporting higher same-store sales: for the quarter ended in February, SSS grew 6.9%, compared to a 4.1% gain the previous quarter. And the profits that the company is generating from those sales seem to be of a very high quality: Bed Bath & Beyond Inc. has a – StarMine Earnings Quality (EQ) model score of 90, indicating that those profits come from sustainable sources and could remain strong in the coming quarters.
To generate its proprietary Earnings Quality (EQ) scores, StarMine uses computer-driven models to analyze the financial statements of more than 33,000 companies and to calculate a ranking for each. These scores have proven to be reliable predictors of the extent to which a company generates earnings that are sustainable over the coming quarters. Expressed on a scale of 1 to 100, (the higher the score; the higher the quality of the earnings) the StarMine EQ model enables investors to compare a company’s earnings quality against that of its peers, companies in the same region or across the entire universe of stocks. Companies with low StarMine EQ scores are likely to have difficulty in sustaining past earnings, while a high StarMine EQ score is a sign that a company is generating its profits from solid business fundamentals.
In the chart below, the green sections of the bars represents the amount by which cash flow from operations (CFFO) exceeded Bed Bath & Beyond’s net income during the last five years. In the last reported quarter (ended February 2012), net income was at a record level of $351 million. Even more encouraging is the fact that its CFFO of $657 million exceeded net income by more than $300 – another record for Bed Bath & Beyond. The company’s cash flow also hit a record high of $573 million in the same quarter. Such strong cash flow is a good sign for any company, as it is an indicator that its profits are backed by strong cash flows and thus are likely to be sustainable in the coming quarters. The cash flow component is one of four key components of the StarMine EQ model and one on which Bed Bath & Beyond scores highly.
Another measure of a company’s earnings health is the return on net operating assets, which measures the efficiency with which a company generates earnings from its operating assets; this can be used as a proxy for a company’s operating efficiency. As can be seen in the chart below, Bed Bath & Beyond (represented by the blue line) has seen its return on net operating assets increase steadily since early 2009. In the last reported quarter, return on operating assets reached 71%, the highest level recorded in the last five years and well above the industry median (represented by the gold line in the chart below) of 28%. Over the course of the last two years, while Bed Bath & Beyond has continued to improve its return on net operating assets, margins as other companies in the specialty retail sector have remained flat.
The company’s operating profit margins also have been improving, and now stand at a five-year high of 17%, well above the industry median of 9%. Together with this return on net operating assets, this measure increases Bed Bath & Beyond’s score on the operating efficiency component of the StarMine EQ model, and contributes to the company’s high EQ model score. These two factors are also inputs used in calculating the company’s return on equity (using the DuPont decomposition), and help explain why the ROE for Bed Bath & Beyond is, at 9%, so far above the industry median of 3.8%.
The number of Bed Bath & Beyond outlets continues to grow, and the company now operates some 1,175 stores nationwide. Of those, 995 carry the Bed Bath and Beyond brand; the remainder are home product and baby product stores. – During his latest conference call in early April, Warren Eisenberg, co-chairman of the company, said he believes the ideal number of Bed Bath & Beyond stores in North America to be around 1,300, which still leaves room for growth. Increasing the number of buybuy Baby brand outlets from the current level – only 64 stores – could be one option. Meanwhile, Bed Bath & Beyond has been selling popular new products, like the new Sodastream machines, which turn ordinary water into sparkling water, and even into flavored sodas. Such innovative products are in demand among shoppers and will help boost earnings in the coming quarters. Boasting a StarMine EQ score of 90 is an indication that during this expansion, investors can feel confident that at least for now, the company’s earnings are coming from sustainable sources and are likely to remain strong in the coming year.
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