Ever hear of the Wonderland Effect?
Of course not. I just invented it.
The Wonderland Effect applies to superstores like Home Depot (NYSE:HD), Whole Foods Market (NASDAQ:WFM) and Bed Bath & Beyond (NASDAQ:BBBY). If you’ve ever been to one of these places — which you have — you know what I mean. Each store has it all. It’s like entering a “wonderland” where you feel like the store has anything you’ll ever need in that particular category.
So, I’ve been wondering if Bed Bath & Beyond might make a great retirement portfolio candidate. I want one of these superstores in my portfolio, but so far they’ve been overpriced.
There are several key driving factors with a business like BBBY’s. The first is competition, and there is a lot of it. Target (NYSE:TGT), Macy’s (NYSE:M), and Walmart (NYSE:WMT) are just a few. However, Bed Bath & Beyond has an advantage over each of them in that its stores specialize in home items. BBBY’s remaining competitors are department stores, which means they have a much more limited selection. You’ll see dozens of different types of clothes hangers at Bed Bath & Beyond; you might get two or three at the others.
The other thing about Bed Bath & Beyond is that it’s a moderate-to-upscale shopping experience. Target is for the masses. Bed Bath is just a bit more discerning in its demographic, and consequently, pricing power is one of its strengths. If you compare Bed Bath’s prices for the exact same item at Target, you’ll find Target to be cheaper. That doesn’t seem to matter, though, because people go to Bed Bath because of its specialty nature.
You might be concerned about the economy’s impact on BBBY, since many items feel like they are discretionary as opposed to staples. But when you slice back into earnings during the financial crisis, here’s what you find:
- In FY2008, the company had net income of $425 million on $7.2 billion in revenue.
- In FY2009, when the majority of companies saw decreases in revenue and net income, Bed Bath & Beyond’s went up. Revenue increased almost 9%, and net income increased 40%.
- The trend continued in FY2010, with revenue up 11% and net income up another 33%.
- FY2011 saw a 13% revenue jump, leading to a 33% net income increase.
- FY2012 saw earnings rise about 24% on a 12% revenue increase.
Bed Bath & Beyond carries $850 million in cash, or almost $4 per share, and has no debt. Trailing 12-month cash flow was $923 million. Stock analysts looking out five years see annualized earnings growth at 13%. At a stock price of $65, and backing out the $4 of cash, on FY13 earnings projections of $4.56, BBBY trades at a P/E of 13.3.
If we put a 15 P/E on projected 2015 earnings of $8.20 per share, we project a rough price target of $123 — or almost a double from here!
Finally, I think I have a superstore worthy of my retirement portfolio.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities but might buy shares of BBBY in the next week. He is president of PDL Capital, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets @ichabodscranium.