Despite Bed Bath & Beyond Inc (NASDAQ: BBBY) gaining 15% over the past year and outpacing the S&P 500 by almost 3%, investors don’t want to get caught sleeping and miss the specialty retailer’s earnings report scheduled for later this week.
BBBY will report quarterly and full-year earnings on Wednesday after the closing bell, and there are a few important numbers besides revenue and earnings that investors should be looking for in the report.
Analysts expect BBBY to report revenue of nearly $3.4 billion and earnings per share of $1.81 for the fourth quarter of 2014, which would be an increase from $3.2 billion and $1.60 from the previous year.
As for the full year, Wall Street wants to see revenue of $11.9 billion and EPS of $5.05 for 2014. In 2013, BBBY posted sales of $11.5 billion and earnings per share of $4.79.
Expectations over the last few months have not changed much as analysts are expecting EPS from $1.74 to $1.84 — indicating that the Street believes investors are unlikely to see a large surprise from BBBY.
But I believe we could see BBBY shares making a big move after the earnings release on Wednesday — and its going to have a lot to do with the company’s share buyback and a possible new share repurchase plan.
BBBY Share Buybacks
In its last earnings report, Bed Bath & Beyond had $1.8 billion left on an initial $7.6 billion share repurchase plan. Through that plan plus an additional accelerated share repurchase program, Bed Bath & Beyond has cut its share count by 23% since 2010.
In the upcoming earnings report, investors need to pay close attention to where the share count is and, more importantly, if the BBBY board has approved a new share repurchase program. This would provide some true detail into how much EPS has truly increased, or if it is being artificially inflated from a reduced share count.
Some companies repurchase stock when earnings slow. Because EPS is calculated by dividing net earnings by the number of outstanding shares, a reduction in outstanding shares would cause EPS to increase even if net earnings are flat or even down.
Many investors compare EPS from previous quarters or years, not net earnings. As long as EPS moves higher, most would think all is well — but that’s not always the case.
BBBY’s Q3 earnings report highlights this maneuver. For that quarter the company posted net earnings of $225 million and EPS of $1.24, with 181 million outstanding shares. The same quarter in 2013, BBBY posted net earnings of $237 million but had an EPS of just $1.13, with 209 million outstanding shares.
BBBY had lower net earnings for 2014 Q3, but higher EPS because the shares outstanding were reduced.
BBBY shareholders should pay attention to the share count and a information about any new repurchase programs because those programs are the only ways BBBY returns capital to shareholders, as it does not pay a dividend. While I will not get into the argument of whether a dividend or share repurchase is better, what I believe matters is that the company is only buying shares when they are truly undervalued and money spent on the repurchases is converted into enterprise value growth.
Unfortunately that is not the case with BBBY.
A decade ago, the market value for BBBY common stock was nearly $12 billion, with 300 million shares outstanding. Today, BBBY has a market capitalization of $14.1 billion and 185 million shares outstanding.
So it would again appear on the surface that the stock buybacks are helping increase the enterprise value, but consider that over the past 10 years the company has spent $9.4 billion repurchasing its own stock.
That’s $9.4 billion to increase BBBY’s worth by $2.1 billion. One could say that BBBY management has essentially thrown away $7.3 billion buying back its own stock over the last 10 years.
Final Thoughts
Currently trading at 14 times earnings, shares of BBBY don’t look wildly overvalued today, but with net income likely declining from 2013 to 2014, and Bed Bath & Beyond lacking an economic moat, even at 14 times earnings shares don’t appear to be a value.
Investors considering holding BBBY stock for the long term need to see net earnings growth this quarter and in the future — and perhaps a little less of management throwing money away at share repurchases.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
