Report created Sep 22, 2017 Page 1 OF 7 Bed Bath & Beyond Inc. is a leading seller of products for the home, including sheets, pillows, blankets and window treatments. Fiscal 2017 sales were $12.2 billion. The company also sells china, small appliances, other household products and specialty foods and beverages. At the end of FY17, the company, which is based in Union, New Jersey, operated 1,546 stores, including 1,023 Bed Bath & Beyond stores, 276 Cost Plus stores, 80 Christmas Tree Shops (which sell gift and household items), 54 Harmon stores (which sell health and beauty products) and 113 buybuy BABY stores. At the end of FY17, the company had about 45 million square feet of retail space. The company operates seven stores under a joint venture in Mexico. Analyst's Notes Analysis by Christopher Graja, CFA, September 22, 2017 ARGUS RATING: BUY Lowering target by $10 to $30 On September 19, Bed Bath reported fiscal second-quarter earnings of $0.67 per share, down from $1.11 in the prior-year quarter. Even if we adjust for all of the costs and events, the 2Q adjusted profit of $0.78 missed our estimate of $0.96 and the average analyst estimate of $0.95. The company's profitability has been under pressure because brick-and-mortar sales have been weak as a result of soft store traffic. Online sales have been strong but that part of the business isn't big enough to pick up the slack. BBBY shares are trading at about 5.8-times trailing earnings, below the five-year average of 15 and at the low end of a range that goes up to 21. The company's peers trade at a median trailing multiple of 21. We believe that BBBY shares are very attractive at the low end of the peer group range, but management must start beating its financial guidance. Our target P/E multiple is now 10, which is down from 11 in our previous note. We think Bed Bath is undervalued even at 10-times, but the reality is that slow store traffic, spending to improve the e-commerce business and negative earnings revisions are weighing on valuation. At 10-times our new EPS estimate for FY18, the shares would be worth $30. INVESTMENT THESIS We are lowering price target on BUY rated on Bed Bath & Beyond Inc. (NGS: BBBY) to $30 from $40. We continue to recommend Bed Bath as a value idea within our retail universe. As a result of lower-than-expected earnings this is now a deep value idea rather than a relative value idea. While we still believe that there is upside on a risk-adjusted basis, the risks have increased. We recognize that margins have been declining and the market does, too. Patience has always been a hallmark of this management team. They focus on the long term, they Data Pricing reflects previous trading week's closing price. 200-Day Moving Average Price ($) Rating EPS ($) 80 60 40 Target Price: $30.00 52 Week High: $29.63 52 Week Low: $22.10 Closed at $28.67 on 9/15 0.37 Quarterly 0.93 1.21 1.09 1.91 0.80 1.11 0.85 1.84 0.53 0.67 1.43 0.46 0.75 0.43 1.51 Annual 5.10 4.58 3.00 ( Estimate) 3.15 ( Estimate) Revenue ($ in Bil.) Quarterly 2.7 3.0 3.0 3.4 2.7 3.0 3.0 3.5 2.7 2.9 2.9 3.7 2.7 3.0 2.9 3.5 Annual 12.1 12.2 12.2 ( Estimate) 12.1 ( Estimate) FY ends Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Feb 28 2016 2017 2018 2019 BUY HOLD SELL Argus Recommendations Twelve Month Rating SELL HOLD BUY Five Year Rating SELL HOLD BUY Rating Weight Under Over Weight Weight Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the next year. HOLD-rated stocks are expected to perform in line with the market. SELL-rated stocks are expected to underperform the market on a risk-adjusted basis. The distribution of ratings across Argus' entire company universe is: 49% Buy, 45% Hold, 6% Sell. Key Statistics Key Statistics pricing data reflects previous trading day's closing price. Other applicable data are trailing 12-months unless otherwise specified Overview Price $22.25 Target Price $30.00 52 Week Price Range $22.10 to $48.83 Shares Outstanding 143.24 Million Dividend $0.60 Overview Consumer Discretionary Rating MARKET WEIGHT Total % of S&P 500 Cap. 12.00% Financial Strength Financial Strength Rating MEDIUM-HIGH Debt/Capital Ratio 35.4% Return on Equity 21.7% Net Margin 4.6% Payout Ratio 0.19 Current Ratio 1.87 Revenue $12.17 Billion After-Tax Income $564.67 Million Valuation Current FY P/E 7.42 Prior FY P/E 4.86 Price/Sales 0.26 Price/Book 1.17 Book Value/Share $19.00 Capitalization $3.19 Billion Forecasted Growth 1 Year EPS Growth Forecast -34.50% 5 Year EPS Growth Forecast 8.00% 1 Year Dividend Growth Forecast 54.05% Risk Beta 1.19 Institutional Ownership 95.78%
Report created Sep 22, 2017 Page 2 OF 7 provide straight-forward accounting, they have maintained a conservative balance sheet and they have always made a thorough study of new initiatives before they have deployed more capital to them. It served them well for many years, but the shares are clearly under pressure because of uncertainty about how much farther margins will fall. To be blunt, a common fear is that this team of top-notch real estate experts and outstanding store merchants is playing catch-up in a rapidly changing market. Bed Bath beat many competitors by giving store managers the ability to tailor their inventories to their local markets. Shoppers found what they wanted and often made impulse purchases that carried high margins. Bed Bath is now facing declining store traffic and a need for more centralized control in its e-commerce platform. Bed Bath is not standing still. Management has hired a new Chief Investment Officer, their first Chief Technology officer and they have launched initiatives to improve customer service, to improve gross margin, to improve inventory management and streamline the supply chain. We think it is impressive that management is funding this transformation while maintaining solid profitability, maintaining investment-grade ratings, and making sensible bolt-on acquisitions. We have also been encouraged that management has responded to investor requests by providing more detail on the business. The recent purchase of One King's Lane enhances BBBY's furniture offering and Personalization Mall adds unique capabilities to provide differentiated merchandise. Bed Bath has also purchased an interior decorating business with a strong online component, as well as new assets from Chef Central. It is also developing proprietary brands and offering product lines with designers and celebrities such as Ellen DeGeneres. Despite our regard for what the company has done we must now see the financial results to justify our continuing optimism. We must see guidance that reflects the reality of the market environment and we must see that management can meet that guidance. The need for another major reduction to our target price would make it very difficult to maintain our rating. Next we must see even more specific initiatives and benchmarks to control costs, stabilize margins and boost sales. Best Buy has done this in an intensely competitive sector. We believe that when investors feel confident that Bed Bath's outlook has reached a floor, multiples will begin to improve. RECENT DEVELOPMENTS On September 19, Bed Bath reported fiscal second-quarter earnings of $0.67 per share, down from $1.11 in the prior-year quarter. The just completed quarter had a $0.08 per share drag because it is restructuring its store management structure. The restructuring had been announced, but it was not included in our model. BBBY also had $0.02 in costs related to Hurricane Harvey and a $0.01 drag from a new accounting standard for stock-based compensation. The company's profitability has been under pressure because Growth & Valuation Analysis GROWTH ANALYSIS ($ in Millions, except per share data) 2013 2014 2015 2016 2017 Revenue 10,915 11,504 11,881 12,104 12,216 COGS 6,526 6,938 7,261 7,484 7,639 Gross Profit 4,389 4,566 4,620 4,620 4,576 SG&A 2,751 2,951 3,065 3,205 3,441 R&D Operating Income 1,638 1,615 1,554 1,415 1,135 Interest Expense 4 1 50 87 70 Pretax Income 1,634 1,613 1,504 1,327 1,066 Income Taxes 596 591 546 486 381 Tax Rate (%) 36 37 36 37 36 Net Income 1,038 1,022 957 841 685 Diluted Shares Outstanding 228 213 189 165 150 EPS 4.56 4.79 5.07 5.10 4.58 Dividend 0.38 GROWTH RATES (%) Revenue 14.9 5.4 3.3 1.9 0.9 Operating Income 4.5-1.4-3.7-9.0-19.8 Net Income 4.9-1.5-6.3-12.1-18.6 EPS 12.3 5.0 5.8 0.6-10.2 Dividend Sustainable Growth Rate 26.6 28.2 32.9 29.2 21.7 VALUATION ANALYSIS Price: High $80.54 $80.82 $79.64 $52.71 Price: Low $54.62 $54.96 $47.73 $38.60 Price/Sales: High-Low 1.7-1.1 1.5-1.0 1.3-0.8 0.7-0.5 - P/E: High-Low 17.7-12.0 16.9-11.5 15.7-9.4 10.3-7.6 - Price/Cash Flow: High-Low 14.6-9.9 11.4-7.8 13.3-7.9 7.7-5.6 - Financial & Risk Analysis FINANCIAL STRENGTH 2015 2016 2017 Cash ($ in Millions) 876 516 488 Working Capital ($ in Millions) 2,141 1,959 1,778 Current Ratio 2.10 2.05 1.87 LT Debt/Equity Ratio (%) 54.7 58.3 54.9 Total Debt/Equity Ratio (%) 54.7 58.3 54.9 RATIOS (%) Gross Profit Margin 38.9 38.2 37.5 Operating Margin 13.1 11.7 9.3 Net Margin 8.1 7.0 5.6 Return On Assets 14.6 12.7 10.3 Return On Equity 28.6 31.7 26.0 RISK ANALYSIS Cash Cycle (days) Cash Flow/Cap Ex 3.6 3.1 2.8 Oper. Income/Int. Exp. (ratio) Payout Ratio 2.6 The data contained on this page of this report has been provided by Morningstar, Inc. ( 2017 Morningstar, Inc. All Rights Reserved). This data (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. This data is set forth herein for historical reference only and is not necessarily used in Argus analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP.
Report created Sep 22, 2017 Page 3 OF 7 brick-and-mortar sales have been weak as a result of soft store traffic. Online sales have been strong but that part of the business isn't big enough to pick up the slack. The company has also had to invest in technology-related projects to support its growing e-commerce business. Although we don't expect this spending to end in the near term, management believes that annual capex should now plateau at about $350 - $400 million this year. Even if we adjust for all of the costs, the 1Q adjusted profit of $0.78 missed our estimate of $0.96 and the average analyst estimate of $0.95. Sales were $52 million below our estimate; gross margin dollars were $23 million lower than our estimate, which was actually a slightly smaller miss than in 1Q; and SG&A dollars were $45 million above our estimate, including all of the additional costs mentioned above. The result is that operating profit dollars were $68 million lower than we modeled. If SG&A dollars had come in as we modeled, operating profit dollars would have been about $22 million lower than we expected. The tax rate was 100 basis points lower than we anticipated and the share count was lower than we modeled as the company continued to repurchase shares. There were a few concerning items in the earnings release. The first was the magnitude of the earnings miss. The second was that management did not provide a specific estimate of how much further margins might fall and they didn't offer guidance on when profitability might bottom. We would also look back to the 1Q earnings release when the company did not provide guidance after an earnings miss. We believe that the shares were pressured because of that uncertainty. The shares received an additional hit after the 2Q release when the company provided full-year guidance of $3.00, which was significantly weaker than the Street anticipated. A possible implication is that management too was surprised by the weakness in 2Q. That is disquieting. Second-quarter sales (for the period ended August 26) fell 1.7% to $2.94 billion, which was below our estimate of $2.99 billion. There was a 90-basis-point benefit to total sales from new stores, and from the acquisitions of One Kings Lane and Personalization Mall. Comparable sales fell 1.7%. The StreetAccount consensus called for a decline of 0.7%. The average transaction amount increased, though the number of brick-and-mortar transactions declined. The reported comp includes both store and online sales. Management said that online sales were up more than 20%, while sales in stores were down in the mid-single digits, which is consistent with the performance in 1Q. The gross margin of 36.4% was 10 basis points below our forecast, and down 100 basis points from the prior year, driven by an increase in shipping expense from higher e-commerce, from lower merchandise margin and from higher coupon expense. The addition of Personalization Mall, which the company will lap in 3Q boosted the GM by 12 basis points. Inventories were slightly lower compared with the prior year, which is encouraging. Management said that inventories were in good condition. Peer & Industry Analysis The graphics in this section are designed to allow investors to compare BBBY versus its industry peers, the broader sector, and the market as a whole, as defined by the Argus Universe of Coverage. The scatterplot shows how BBBY stacks up versus its peers on two key characteristics: long-term growth and value. In general, companies in the lower left-hand corner are more value-oriented, while those in the upper right-hand corner are more growth-oriented. The table builds on the scatterplot by displaying more financial information. The bar charts on the right take the analysis two steps further, by broadening the comparison groups into the sector level and the market as a whole. This tool is designed to help investors understand how BBBY might fit into or modify a diversified portfolio. P/E 40 30 20 10 BBBY Value WWW MAT 5-yr Growth Rate(%) RL TUP WSM DKS 10 15 20 Growth UAA NTRI 5-yr Net 1-yr EPS Cap Growth Current Margin Growth Argus Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating MAT Mattel Inc 5,141 10.0 15.0 4.5 30.0 HOLD RL Ralph Lauren Corp 4,900 13.0 17.0 -.3 2.1 HOLD WSM Williams-Sonoma Inc 3,967 13.0 12.8 6.0 6.8 BUY BBBY Bed Bath & Beyond Inc 3,187 8.0 7.4 4.6 5.0 BUY UAA Under Armour Inc 3,050 22.0 37.5 4.4 22.7 HOLD TUP Tupperware Brands Corporation 2,988 12.0 12.5 7.0 9.4 HOLD WWW Wolverine World Wide Inc 2,631 10.0 16.5 3.3 18.2 HOLD DKS Dick's Sporting Goods Inc 2,221 14.0 7.1 3.7 8.1 BUY NTRI NutriSystem Inc 1,563 22.0 26.7 7.6 10.8 BUY Peer Average 3,294 13.8 16.9 4.5 12.6 P/E Price/Sales Price/Book PEG 5 Year Growth Debt/Capital
Report created Sep 22, 2017 Page 4 OF 7 Selling, general and administrative expenses, as a percentage of sales, came to 30.6%, approximately 200 basis points above our forecast and 260 basis points higher than last year. In addition to storms and restructuring, SG&A was hurt by higher payroll, higher advertising expense, restructuring charges, occupancy expense, an increase in technology spending and costs related to Hurricane Harvey. Personalization mall increased the expense rate by 6 basis points. The second-quarter operating margin of 5.8% was about 210 basis points below our estimate and down 360 basis points year-over-year. The result was 180 basis points below consensus, although the numbers are probably not comparable. Further down the income statement, interest expense was approximately $19 million, which was slightly higher than we modeled. Earnings before taxes were $70 million below our estimate. The company's tax rate was 37%, which was below our estimate of 38%. Net income of $94 million was below our estimate of $136million. The share count was lower than our forecast as a result of continuing share repurchases. EARNINGS & GROWTH ANALYSIS We are lowering our FY18 earnings estimate to $3.00 from $4.12 per share. This is a major hit. Management did not update its full-year guidance after the 1Q earnings miss and core 2Q earnings came in weaker than expected with the additional headwinds of a restructuring charge, two major hurricanes, incremental e-commerce spending and what appears to be a deceleration in store traffic since the beginning of 2Q. The company expects 20% of the year's remaining earnings to come in 2Q and 80% of remaining earnings to come in 4Q. For the third quarter, we cut our sales forecast to a 2% decline from a 1% increase. We reduced our gross margin forecast by 50 basis points to 35.9% on a combination of pricing pressure and unfavorable product mix. We also raised our SG&A estimate on the likelihood of higher expenses than we anticipated. There is a slight offset from a lower share count. That said, we are reducing our estimate to $0.37 from $0.72. For 4Q, we are reducing our estimate to $1.43 from $1.90. This reflects a reduction in our estimate of sales growth to 3.3% from 6%. There is an extra week in the fiscal period. We are cutting our gross margin estimate by 60 basis points to 37%, and we are raising our forecast for SG&A. We are lowering our FY19 earnings estimate to $4.30 from $3.15 per share. The company will be going back to a normal 52-week fiscal period from 53 weeks this year and that will pressure 4Q sales, but we have known that all along. We are now modeling a 1% decline in sales compared with a 1% increase previously. We are modeling about 30 basis points of gross margin pressure, compared with our FY18 estimate and a higher expense rate than we modeled previously. Our estimate of the expense rate is down about 200 basis points from our previous estimate to 6.4%. We recently reduced our five-year EPS growth rate estimate to 8% from 12%. We don't like to tinker with our long-term estimates. We continue to see bounce-back growth beginning in FY19 and continuing into FY20 and FY21, but at this point we're far more likely to reduce than increase our growth rate estimate. We use a range of growth rates in our valuation analysis, and we do a lot of our valuation using actual modeled estimates rather than by just assuming a single growth rate over a particular period, so this doesn't have a major impact on our valuation assessment. We encouraged that growth in square footage is flattening. We believe that the acquisition of One Kings Road and Personalization Mall can enhance Bed Bath's growth prospects. And we expect to see benefits from other acquisitions that will give the company more differentiated merchandise. The company has always taken a measured and long-term approach to opening stores and we think management will wait for the right locations or right takeover candidates rather than striving to meet short-term targets. That said, management must act with greater urgency to stop the erosion of profitability. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on BBBY is Medium-High, the second-highest rank on our five-point scale. We regard Bed Bath as a strong and well-managed business, but we acknowledge that margins have come down and with growth stalled, there could be more shareholder pressure to increase debt for share repurchases. Our bias is for reducing our financial strength assessment. We believe that Bed Bath's profitability and cash generation give it the flexibility to finance its growth and business transformation internally. The company's recent $1.5 billion debt offering and accelerated share repurchase agreement raises its financial risk, but we are maintaining our Medium-High assessment. Bed Bath has a BBB+ credit rating from S&P and a Baa1 rating from Moody's. Moody's has a stable outlook, but S &P is negative. Based on available financials, the company has operating leases, which Argus treats as debt. Including our estimate of the present value of these obligations ($2.3 billion) gives us adjusted debt of about 58% of capital at the end of 2Q18, which is now in line, to slightly above the average for retailers we follow. We estimate that lease-adjusted debt was about 1.9-times EBITDAR (operating income plus rental expense plus depreciation) at the end of FY11, 1.7-times at the end of FY12, 1.8-times at the end of FY13 and 2-times at the end of FY14. We believe that Bed Bath's profile is consistent with our financial strength assessment and consistent with solid, investment-grade ratings, when we consider the company's cash position and operating margin. In conjunction with the debt offering, the company announced the creation of a $250 million revolving credit facility. This increases the company's financial flexibility. The company did not tap the revolver in FY16 or FY17. It does not appear that management tapped the revolver in 1H18, and we do not expect the company to use the facility on an ongoing basis. Bed Bath had $464 million in cash and short-term securities on the balance sheet at the end of the second quarter and $99 million in long-term investment securities. The company repurchased $2.2 billion of common stock in FY15, including $947 million in 4Q. BBBY repurchased approximately $1.1 billion of its stock in FY16. It repurchased approximately $550 million of shares in FY17, $127 million in 1Q18 and $56 million in 2Q18, leaving it with a remaining authorization of $1.6 billion. In the 4Q16 earnings release, the company initiated a quarterly dividend of $0.125 per share. In FY17, dividends totaled $0.375 per share, reflecting three payments at this rate. The company then announced a dividend increase in its 4Q17 earnings release. Our
Report created Sep 22, 2017 Page 5 OF 7 FY18 dividend estimate is $0.575 per share. Our FY19 dividend estimate is $0.63 per share. On the 3Q17 call, CEO Steven Temares said that the company's capital priorities are reinvesting in the business, making acquisitions that help it to do more with customers, continuing the recently initiated dividend, and repurchasing shares. MANAGEMENT & RISKS We believe that management has run this specialty home furnishings retailer effectively, as evidenced by its high margins and by the execution of its premium home furnishings 'category-killer' strategy. The company is a leader in the home furnishings segment. Its closest competitor in the premium niche, Linens 'n Things, (which filed for bankruptcy and liquidated merchandise) often had an operating margin that was substantially lower than that of BBBY. The biggest current problem is internet competition. A second problem is that store traffic is very weak across retail. A consequence to BBBY is that the company has always done a great job of selling you more than you planned to buy, and often at an attractive margin to the company. When foot traffic is weak, it loses the ability to sell high margin snacks, gadgets and accessories to buyers making an impulse decision. We believe that Bed Bath's edge has come from the merchandising skill of its store managers, who can make decisions based on local demographics and climate. As an example, some stores in New York sell window fans in the winter; managers understand that residents don't have total control of the heat in some apartment buildings and want fresh air. Some of the New York stores also provide delivery service and help shoppers to get taxis. Similarly, the Christmas Tree Shops on Cape Cod have an abundance of beach chairs, boogie boards, sand toys, and plastic plates and utensils. A challenge is that e-commerce is a much more centralized model than the one that has allowed BBBY to out maneuver local competitors. The company is playing catch up in developing analytics and distribution capabilities and that spending is weighing on earnings. BBBY faces competition from Williams-Sonoma, Pier 1, Restoration Hardware, Pottery Barn, Macy's, Wayfair, and the Home Goods chain that is owned by TJX. At this point, we are also concerned about competition from stores such as Wal-Mart, Target, Kohl's and J.C. Penney, which sells appliances as well as linens. We don't believe that any of these retailers are likely to match BBBY's full line of product offerings or consistently match the company's merchandising of core products. The risk of online competition is growing with Wayfair, Casa.com, an Amazon subsidiary, and e-commerce offerings from a host of retailers. BBBY is striving to offer more unique merchandise and to improve the functionality of its e-commerce site. Computer hackers are a growing threat in retail and BBBY could see its costs rise and its reputation suffer if hackers breach its computer system and take customer credit or debit-card data. We regard Bed Bath as one of the finest merchants in all of retail, and we don't believe that its merchandising or store experience is easy to replicate. Bed Bath has competed successfully against Amazon, Wal-Mart, Target, and the department stores for years. We also believe that Bed Bath's in-store experience is unique and that the company's merchants do a great job displaying new items and tailoring stores to local preferences. Unfortunately this advantage is dwindling with declining store traffic. Saturation is another risk that we will be monitoring and BBBY, like all other traditional retailers must make hard decisions on what its store portfolio should look like in five years. One risk that management can't control is weakness in consumer spending. It could continue to be a particular risk in an intensely competitive market. High cotton prices represent a risk to gross margin if the company can't pass higher merchandise costs on to shoppers. COMPANY DESCRIPTION Bed Bath & Beyond Inc. is a leading seller of products for the home, including sheets, pillows, blankets and window treatments. Fiscal 2017 sales were $12.2 billion. The company also sells china, small appliances, other household products and specialty foods and beverages. At the end of FY17, the company, which is based in Union, New Jersey, operated 1,546 stores, including 1,023 Bed Bath & Beyond stores, 276 Cost Plus stores, 80 Christmas Tree Shops (which sell gift and household items), 54 Harmon stores (which sell health and beauty products) and 113 buybuy BABY stores. At the end of FY17, the company had about 45 million square feet of retail space. The company operates seven stores under a joint venture in Mexico. The company's fiscal year ends on the Saturday closest to February 28. VALUATION BBBY shares have fallen nearly 50% over the last 12 months. The shares are trading at 7.4-times our FY18 estimate and at 7-times our FY19 estimate. We think this is attractive relative to the S&P 500, which is trading at approximately 19-times our 2017 estimate. Bed Bath is an excellent merchant, but the discounted multiple reflects competitive pressures and concerns that the company's business model is more vulnerable to internet competition than those of retailers like Home Depot. The valuation is also being hurt by considerable uncertainty about where sales and margins will stabilize. Bed Bath had about $563 million in cash and investment securities at the end of the second quarter, or almost $4.00 per share. BBBY shares are trading at about 5.8-times trailing earnings, below the five-year average of 15 and at the low end of a range that goes up to 21. The company's peers trade at a median trailing multiple of 21. We believe that BBBY shares are very attractive at the low end of the peer group range. Bed Bath is trading at a lower multiple than Williams-Sonoma at 13.5, Home Depot at 22, and Lowe's at 15, which we believe reflects concerns that Bed Bath is more vulnerable to online competition. We believe that an improvement in comp or margin trends could be a catalyst for a higher multiple. Our target multiple is now 10, which is down from 11 in our previous note. We think Bed Bath is undervalued even at 10-times, but the reality is that slow store traffic and spending to improve the e-commerce business are weighing on valuation. At 10-times our EPS estimate for FY18, the shares would be worth $30. The shares are trading at an enterprise value of 4.4-times trailing EBIT. At 6-times our estimate for the next four quarters, the shares would be worth $25.60 and we think there is substantial upside in both EBIT and the multiple if the company can even show that the margin erosion is coming to an end. We are maintaining our BUY rating, but are lowering our target
Report created Sep 22, 2017 Page 6 OF 7 price to $30 from $40. On September 22 at midday, BUY-rated BBBY traded at $22.23, down $0.02.
METHODOLOGY & DISCLAIMERS Report created Sep 22, 2017 Page 7 OF 7 About Argus Argus Research, founded by Economist Harold Dorsey in 1934, has built a top-down, fundamental system that is used by Argus analysts. This six-point system includes Industry Analysis, Growth Analysis, Financial Strength Analysis, Management Assessment, Risk Analysis and Valuation Analysis. Utilizing forecasts from Argus Economist, the Industry Analysis identifies industries expected to perform well over the next one-to-two years. The Growth Analysis generates proprietary estimates for companies under coverage. In the Financial Strength Analysis, analysts study ratios to understand profitability, liquidity and capital structure. During the Management Assessment, analysts meet with and familiarize themselves with the processes of corporate management teams. Quantitative trends and qualitative threats are assessed under the Risk Analysis. And finally, Argus Valuation Analysis model integrates a historical ratio matrix, discounted cash flow modeling, and peer comparison. THE ARGUS RESEARCH RATING SYSTEM Argus uses three ratings for stocks: BUY, HOLD, and SELL. Stocks are rated relative to a benchmark, the S&P 500. A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Strategist. A HOLD-rated stock is expected to perform in line with the S&P 500. A SELL-rated stock is expected to underperform the S&P 500. Argus Research Disclaimer Argus Research is an independent investment research provider and is not a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of Argus Group Inc. The information contained in this research report is produced and copyrighted by Argus, and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. This report is not an offer to sell or a solicitation of an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research since 1934. Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company s stock. Morningstar Disclaimer 2017 Morningstar, Inc. All Rights Reserved. Certain financial information included in this report: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.