Valuation multiples help investors compare companies with a similar business model. We have opted for the forward PE (price-to-earnings) multiple due to the high visibility of Bed Bath & Beyond’s (BBBY) earnings. A forward PE multiple is computed by dividing the company’s stock price with analysts’ earnings estimates for the next four quarters.
The decline in Bed Bath & Beyond’s 3Q17 margins and a weakness in the broader equity market appear to have led to a fall in its stock and valuation multiple. As of April 5, 2018, BBBY was trading at 7.7x compared to 8.9x before the announcement of its 3Q17 earnings.
From the above graph, you can see that Bed Bath & Beyond is trading below its peers’ median value. BBBY’s EBIT (earnings before interest and tax) margins were lower than its peers’ margins in 2017. That and its negative SSSG (same-store sales growth) have caused the company to trade at a lower valuation multiple than its peers. On April 5, Williams-Sonoma (WSM), Lowe’s (LOW), and Home Depot (HD) were trading at forward PE multiples of 12.3x, 15.9x, and 18.7x, respectively.
To drive its SSSG, BBBY has been focusing on enhancing the customer experience by implementing digital advancements, renovating its stores, utilizing industry-leading optimization software to improve the efficiency of its supply chains, and implementing various marketing and promotional initiatives. All these initiatives are expected to increase the company’s expenditure. If these initiatives fail to generate expected sales, the increased expenditure will put pressure on the company’s earnings.
For the next four quarters, analysts are expecting BBBY’s EPS (earnings per share) to fall 22.3%, which could have been incorporated into the company’s current stock price. If the company fails to post earnings in line with analysts’ estimates, the selling pressure could bring the stock and its valuation multiple down.
Next, we’ll look at analysts’ recommendations.