- This business demonstrates a keen understanding of the future of retail.
- Strategic initiatives will drive growth for the next 3 to 5 years.
- Investment in infrastructure and people to drive their omnichannel initiative has been very successful.
- STRIDE's 3 year fair value target of $90 is easily achievable for this management team.
When Bed, Bath and Beyond (NASDAQ:BBBY) announced it's fiscal quarter 2 results on the 23rd of September, we once again saw what so many of us have come to expect from this forward-thinking retailer. Growth in revenues, growth in profit, growth in retail space and growth in the management team and their mindset on how to move forwards in an ever-changing and complicated retail environment.
This team has shown an attitude towards change that is rare and difficult to find, especially in an established business with clearly established processes and go-to-market strategies. I applaud their understanding of the challenges they are facing and the manner in which they've systematically gone about execution of small, meaningful objectives to tackle each and every one of them.
Coupling this with their consistent attitude to ensuring shareholder value is front-of-mind and you have a powerful formula for attracting both growth-focused and value-focused investors alike.
This initiative had every opportunity of being a vast waste of time, money and effort. Creating a multi-prong approach to tackle the current shortcomings of their e-commerce infrastructure, forge ahead with a new mobile strategy, address weaknesses in their point-of-sale systems, deploy a new state-of-the-art data centre to bring it all together while updating almost all of their processes is the type of project that could spell the end for a business like this. I've witnessed this sort of programme going badly wrong at retail giants like Kingfisher Group and Tesco before, so when I read about it all in their latest annual report 6 months ago when we were looking to buy in, I was a little nervous. It was only on reviewing their previous annual report and seeing how this was just an extension of everything they had promised and delivered on in the previous 12 months that I realised how clear their vision and execution of that vision has been to date. Six months and so far, I've witnessed clear execution against this strategic objective outlined in the last annual report. New responsive e-commerce storefronts, mobile apps and coupon systems are clear at the front and the annual report made clear what had to happen behind the scenes to make this happen. It seems to have been a large undertaking that has gone remarkably smoothly.
Focus on customer experience
Unfortunately, I've never been in one of their stores. On my many trips to the US, I've just never found reason (as a tourist) to, but I will stop in on my next trip over - just to see what I'm being a part of. Reviewing the business on Glassdoor and Indeed though, it appears there is a relentless focus on the customer - which is great. It is a little disturbing to see some of the negative reviews about working in their retail environment, but I do understand the challenges to be faced running a large retailer and trying to keep staff morale and culture constant. Perhaps a little more focus here could pay off in the long-run, but I'm not close enough to the business to be able to tell. I do like the fact that most staff have a positive outlook on the future of the business though.
A couple of other things stand out for me. The business is focused on IT and analytics and how this can drive the marketing efforts of the business. As a part owner of an up-and-coming inbound marketing business, I fully understand the importance of this shift from outbound marketing to making sure you're there when the customer needs you. It's great to see they've embarked on this journey and I'm positive it will yield the same fantastic results we're seeing at Struto.
A new distribution facility to help drive direct to customer and store fulfilment is another clear positive and demonstrates both expansion and their commitment to the omnichannel initiative above.
A lot of the commentary from staff is around their antiquated point-of-sale system that is currently being updated. While new systems are generally a positive, without some experiential feedback we can't be sure if this is working yet or not.
Shareholder value creation
The management team has been focused on returning value to shareholders while they think the business is trading cheap. I'm not a fan of debt-sponsored buybacks in general, however, $1.5B of debt at an average of roughly 5% with maturity dates spread over the next 30 years seems reasonable to me. It's not a massive amount of debt to service, the rates are not particularly cheap but easily sustainable for the business, especially given their stellar returns on equity and the share price is right for a buyback.
1. Strength - the business has a very high Strength rating of 92. While this is down from it's 2012 peak of 100, it has stabilised and even recovered one point from last year.
2. Timing - The share price is currently rising and showing strength after a dip to an almost 52 week low of $56.70 in June. The market seems to be happy with the progress of the business and we would consider buying this momentum with such a great valuation in place.
3. Returns - While this has had a slightly rocky ride over the past 5 years, returns have been consistently high and well above the average in the retail sector. Currently at 25.5% return on average equity, it scores a high rating.
4. Intrinsic value - no-one excepts a retailer to have a huge book value representation of share price. While this is trending downwards, it's of no great concern as no-one should be buying this business in a Graham type discount to book value model.
5. Dividends - the business doesn't pay any.
6. Earnings predictability - four years of growth at every level, including free cash flow per share. Perfect scores for perfect growth.
Growth and value at a reasonable price
Our perspective on this business is that their investment levels should see growth levels of around 12%. The management team has given guidance at the 7% level. Historically, they have generally beaten this number (7 times in the last 11 quarters), so I wouldn't be surprised to see this again.
The business trades just below our consider buy of $73 and has great momentum, so we rate it a strong buy.
We're holding this and have been since the 27th of September when our new timing engine popped it on our target list.
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