The last of the superstores are dying. Remember the days when superstores were killing the mom-and-pop stores? Remember how convenient it was to find everything you needed in one place, without multiple trips? Remember the days before Amazon.com, Inc. (NASDAQ: AMZN), before the days of minuscule overhead, when companies like Bed Bath and Beyond (NASDAQ:BBBY) ruled? Looking at BBBY stock, it’s clear those days are over.
Today, all retailers are struggling. However, what we’ve learned in recent years is that the Amazon Effect isn’t just hitting all retailers. We’ve learned that upscale brands are not packing people in like they used to.
See, I’d always considered BBBY as something akin to a home product parallel to Whole Foods Market, now owned by Amazon. BBBY, like Whole Foods, gave shoppers upscale and branded versions of things one might find at department stores.
BBBY Stock Suffers from Niche Death
BBBY filled a niche that lay between the luxury of Nordstrom (JWN) and the more standard fare of Macy’s (M). To make a comparison with hotels, BBBY was “upper-upscale,” jammed between “upscale” and “luxury”.
But luxury has been struggling in retail, and the major retailers are getting killed by Amazon. Now I think BBBY and BBBY stock are facing a declining trend that will not stop.
BBBY sales fell 1.7% to $2.94 billion, down from $2.99 billion last year, which is just plain awful. What matters, as I always say, is same-store sales. It tells us if people are shopping at the same store they usually do, and if a store can maintain pricing power.
Ugh. BBBY same-store sales fell 2.6% — which is terrible. Even worse, cost of sales stayed relatively stable, which means gross profit got clocked to the tune of about 5%. Even WORSE, SG&A expenses rose by almost 8%. At a point where sales are falling, BBBY must control expenses under control but they got worse. The result is that operating profit really got nailed, falling from $281 million to just $169 million, a decline of almost 40%. There is no way this number can be spun into anything good.
When we look to actual net income to see the effect of share repurchases, we see net earnings fell from $167.3 million to $94.2 million – a massive decline of almost 45%.
That’s when you might cringe, and see the 15% decline in net income, from $187 million to $158 million. Ugh.
Not surprisingly, cash flow suffered at a result. Operating cash flow fell from $184 million to $154 million, and free cash flow fell to $86 million from $120 million.
When we look at full year results, the trend has been declining for some time, along with BBBY stock. Net income for FY15, FY16 and Fy17 respectively was $957.5 million, $841.5 million, and $685 million. That’s a 28% decline over just two fiscal years.
BBBY Stock Bottom Line
The financials have gotten worse. Cash on hand was $875 million on Feb. 28, 2015 and is now at $464 million. What really annoys me is that awhile back, BBBY drew down almost $1.5 billion in debt. The company did this to repurchase stock! I hate this idea. It creates around $75 million in interest payments every year, which deducts from the bottom line. The stock repurchase plan has been incredibly stupid because the stock has lost nearly 70% of its value over the past few years.
On a net income run-rate of $190 million, BBBY stock trades at a valuation of $3.3 billion. Why on earth is a company with cratering net income trading at almost 17x earnings?
Sell, sell, sell.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
