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Non-Tech : Bed, Bath, and Beyond (BBBY)
BBBY 13.70-2.6%Jan 19 4:00 PM EST

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To: Neil H who wrote (69)7/25/2003 9:40:21 AM
From: Neil H  Read Replies (1) of 77
 
Bed, Bath & Beyond Adolescence
Page 3

At the time of the Christmas Tree acquisition, Bed Bath & Beyond was trading at more than 30 times the company's projected current-year earnings, a pricey multiple for an established retailer. That was rich enough for some investors, and the stock is down 11.4% since it reported earnings last month. In contrast, the S&P Retail Index is up 2.3% in the same time period as companies such as Wal-Mart (WMT:NYSE - news - commentary - research - analysis), Target (TGT:NYSE - news - commentary - research - analysis) and Lowe's (LOW:NYSE - news - commentary - research - analysis) have held steady or gained.

Nevertheless, several sell-side analysts reiterated positive ratings after the earnings announcement. And some praised the company's Christmas Tree acquisition, saying that it would provide continued, complementary growth.


" [Bed Bath & Beyond's] back is not up against the wall. It is not acquiring out of a need to grow," wrote Banc of America Securities analyst Aram Rubinson in a report last month. "Rather, the acquisitions it is making are more integral to the core than most retail acquisitions. At the same time, Christmas Tree Shops may be a crucial sourcing and merchandising partner." (Banc of America Securities has an investment banking relationship with Bed, Bath & Beyond.)

One hedge fund analyst concurs, saying the recent selloff in Bed Bath & Beyond shares has been overdone.

The analyst, whose fund is long the stock, praises the company's management team, saying they've done a good job at managing Wall Street's expectations. As they've been in the past, Bed Bath & Beyond's managers are likely being conservative about square footage and earnings expectations to give themselves room to surpass expectations, said the analyst, who asked not to be named.

The company is continuing to open stores and is continuing to grow, the analyst said. Bed Bath & Beyond's same-store sales, which compare results at like outlets open for more than one year, grew by an impressive 4.4% in the first quarter, while other companies struggled, the analyst noted. And the acquisition is a better use of cash than buying back shares or paying a dividend, the analyst said.



"I think it's a real class story," the analyst said.

Maybe so, but the piling on of stores isn't necessarily a growth panacea. Analysts point to another one-time highflier that tried the same strategy and lost: Toys R Us (TOY:NYSE - news - commentary - research - analysis), which kept heaping big-box stores into smaller and smaller cities with decreasing returns. It now trades around $12 and at an earnings multiple of about 11.

Says another retail analyst: "Toys R Us proved that you can grow yourself into the ground."


Neil
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