Best Buy vs. Bed Bath & Beyond


From: James Cramer
Sent: Saturday, March 17, 2012 10:41 AM
To: Nicole Urken
Subject: RE: NEXT WEEK

Send me the negative pieces about Bed Bath & Beyond that made people feel that it was an amazon showroom. I want to see how people could have been so wrong on this.

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Saturday, March 17, 2012 2:11 PM
To: James Cramer; Stephanie Link
Subject: RE: NEXT WEEK

Will send Bed Bath & Beyond notes—as you mentioned, it hasn’t been hit from online competition like the hard goods names Best Buy et al that we put in the sell block.


From: James Cramer
Sent: Saturday, March 17, 2012 4:10 PM
To: Nicole Urken
Subject: RE: NEXT WEEK

The Bed Bath & Beyond was a perception that it could be Amazon’d.. We need to do a piece (pieces) about who in retail can’t be amazon’d. Bed Bath comes to mind.

Surprise news of Tuesday morning: Best Buy announced that its CEO Brian Dunn resigned.

Certainly it is no shocker that Best Buy and its core business model have been struggling—we placed the retailer and its cohort — Radio Shack and HH Gregg — in the 'Sell Block' segment back in December on "Mad Money," warning investors against falling into a value trap. With the stock down almost 30 percent in the last year, Best Buy’s struggles were topped off most recently by its disappointing quarterly announcement at the end of March. And the company’s restructuring initiative unveiled on the same day — including $800mm in cost reductions by 2015 — received a lukewarm response by the investment community. Turnaround initiatives have ultimately been too little, too late… as the brick & mortar retailer continues to be plagued by its status as's show-room.

The big conundrum that many investors can’t wrap their head around: How has Best Buy managed to get killed so ruthlessly by online competition while Bed, Bath & Beyond continues to perform with flying colors? Simply by adding a “B” to the ticker symbol input bar on Yahoo! Finance yields a much more attractive chart. Those upward curving slopes of the BBBY chart (up just under 30 percent in the last year) vs. the dismal descent of BBY? No comparison.

Bed, Bath & Beyond managed to announce another stellar quarter just last Wednesday after the close — with better-than-expected same store sales (6.8 percent vs. consensus of just under 4 percent) and a big EPS beat ($1.48 vs. $1.33 consensus). While some analysts still are questioning the home goods retailer’s staying power (pointing to price competition and margin pressure), the stock still surged, a stand-out even among the retail same-store sales stars of Thursday morning like TJX Cos and Ross Stores.

So what gives? In wake of continued Best Buy struggles, how has Bed, Bath & Beyond managed to continue its outperformance?

Many analysts have been betting against Bed, Bath & Beyond, putting it in the same cohort as Best Buy which has gotten pounded by the online dominance of Amazon. For example, Citi downgraded the stock to 'neutral' on Valentine’s Day (no love!) largely because of encroaching competition from online retailers. But they have been, frankly, dead wrong.

First, growth opportunity. All this week, "Mad Money" has been celebrating the return of growth stocks, building the ultimate growth portfolio for 2012 based on the characteristics that the quintessential growth stock of our era — Apple — has embraced. While Best Buy is frantically looking to save itself and stop the bleeding, Bed, Bath & Beyond has … growth (!) Its current stores are posting strong comps, and there remains ample opportunity for continued store openings. The flagship concept has about 990 stores, and the company has laid out a long-term opportunity to operate in excess of 1,300 — about 30 percent higher than current levels. This comes on top of continued growth in the Christmas Tree Shops, buybuy BABY concepts, and Harmon Face Values stores. We have returned to an era where upside potential, combined with strong execution, are rewarded with higher multiples and higher stock prices.

Second, industry. The consumer electronics space has transformed dramatically in recent years with a significant shift to online distribution, particularly in the wake of the Circuit City liquidation. Product cycles have moved away from Best Buy’s traditional areas of strength. In contrast, the online penetration of the Home Furnishings category (currently around 10 percent according to ComScore and U.S. Census Bureau data) is lower versus other categories: Office Supplies (34 percent online penetration), Books & Magazines (29 percent), Music/Movies/Videos (19 percent), Computer Software (14 percent) and Consumer Electronics (14 percent). Note: In this regard, the office supply names like Staples , Office Max , and Office Depot are at risk. Importantly, the majority of Bed, Bath & Beyond merchandise lower-ticket items have less downside pricing risk versus Best Buy, whose big ticket items like TVs face more pricing and commoditization pressure. Plus, Bed, Bath & Beyond’s existing home furnishings offerings (the higher priced items) are already on-par with Amazon, particularly when a 20 percent coupon issued.

Third, the in-store experience. Bed, Bath & Beyond is the closest to Costco in offering a “treasure hunt” experience which optimizes impulse purchases from the in-store experience. Importantly, through its couponing and direct email, Bed, Bath & Beyond has effectively learned how to drive traffic to its stores. The company has demonstrated strong execution of both its merchandising strategy and customer support, which have enhanced the in-store experience further. For example, the company has continued to test store-within-store set-ups to drive traffic to items such as health and beauty care along with consumables.

Fourth, balance sheet. While bulls point to Best Buy’s cash flow generation, the company is still net debt, and has not used its capital in a shrewd manner—buying back stock at higher levels, opening and then closing international stores, and embarking on ill-timed acquisitions like Carphone Warehouse’s European assets. On April 5, the S&P placed the company’s credit ratings on CreditWatch, with Negative Implications, implying a 50 percent change of a downgrade to Junk in the next three months. Bed Bath, & Beyond, in contrast, has a very strong balance sheet, supported by strong operational execution. Last quarter, inventory per square foot was up 2.1 percent year-over-year versus 9.1 percent sales. There was $1.9bn or almost $8 per share in cash on the balance sheet at the end of last quarter even after the company bought back 5.9mm shares for $359mm — and with about $920mm remaining on authorization that management expects to exhaust by year-end.


And last, clarity. Best Buy has none — its history has been tainted by false starts and this lack of clarity remains as its core categories that drive traffic — Consumer Electronics and Entertainment — continue to decline, with uncertainty looming over the company’s ability to capture share in growth segments like mobile phones. Best Buy has announced three major restructurings in the last year where savings initiatives come at a steep upfront cost that continue to yield negative comps and falling productivity — with an inability to recoup from the ill-timed store growth hangover of 2005 through 2011. Bed, Bath & Beyond has a clear path to growth including in-store improvements and unit expansion… with continued execution defending these initiatives.

The bottom line: Best Buy’s pain doesn’t mean you should pull the covers over Bed, Bath & Beyond as well. Add a “B” to BBY and you have a buy… BBBY. It is more closely aligned to the growth stocks of our era that have been highlighted on "Mad Money" this week than the secular decliners like BBY.


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