Signs of Weakness at Bed Bath & Beyond

The month of August was a good one for Bed Bath & Beyond (NASDAQ: BBBY ). Its
same-store sales increased 8%, several analysts upgraded its stock and the share
price managed to lose less than 3% in a terrible month that saw the S&P 500 drop
more than 5%. Everything seems to be going right for the home furnishings chain,
and its stock price reflects this. While I can't tell you how long this
euphoria will last, I can tell you some of the reasons why it probably won't.
Online Sales This is my biggest argument against Bed Bath & Beyond. In 2010, its
revenues were $8.8 billion, yet its online sales totaled just $88.7 million and
grew by only 3%. Those transactions represent just 1% of revenues. Whoever's
in charge of their e-commerce either needs replacing or given a good pep talk.
These numbers are truly embarrassing. Restoration Hardware, which filed a
registration statement with the SEC on Sept. 9 and is a direct competitor of Bed
Bath & Beyond, did $161 million in online sales in 2010 on $773 million in
revenue. That's 21% of the total and double its much larger rival. For those
who don't remember, Restoration Hardware was taken private for $232 million in
June 2008. At the time, it was struggling financially and only now is coming out
of its tailspin. Yet it's able to generate a greater return from its websites.
Bed Bath & Beyond is leaving significant profits on the table. Williams-Sonoma
(NYSE: WSM ) generates approximately 42% of its revenue online with operating
margins three times those of its retail stores. Bed Bath & Beyond's operating
margins are the same as those of Williams-Sonoma, meaning it's doing a good
job delivering store-level profits. If its e-commerce revenues had grown to 25%
of its overall total, in 2010 alone it would have generated an additional $100
million in operating profits. Unfortunately, it's so far behind most other
large retailers, it's hard to imagine it seriously competing in e-commerce
without a complete change in business strategy. And that's not happening.
Share Repurchases Bed Bath & Beyond loves buying back stock. In the past five
years, it has used 75% of its $2.5 billion in free cash flow to repurchase 48.4
million of its shares at an average price of $51.65. Based on its Sept. 13 price
of $59.21, its annualized return on investment is 2.5%. That's not much for
several billion dollars in shareholder funds. Perhaps the company could have
taken $250 million of that sum and allocated it to the improvement of its
e-commerce program. The company would be far better off. In addition, because it
has no debt and funds store openings through cash flow, it seems odd that it
doesn't pay a dividend. Evidence suggests