Financial Analysis Report of Bed Bath & Beyond

1. Introduction

 

In this report I will discuss the financial analysis of a publicly traded company called Bed Bath & Beyond (BBBY) and compare its performance with one of its competitors Target (TGT). This comprehensive financial report will look at the figures from the year 2018 and 2017 and finally, it will help us conclude that whether it is advised to keep investing in this company for future or not.

According to Fidelity (2018), Stocks and stock mutual funds or ETFs have offered the most growth potential compared to bonds and other short-term investments. In this report, I will be using the 10-K documents i.e. the income statement, the balance sheet and the cash flow sheet to carry out my analysis.

Bed Bath & Beyond Inc. operates the largest houseware goods specialty stores in the United States (Funding Universe, 2013). According to Wikipedia (2019), BBBY was founded in 1971. As the company grew over the years, it also acquired new companies that sold domestic merchandise and discount apparel and health and beauty products. By 1985, Bed Bath & Beyond was a major domestic merchandise retailer throughout the United States. The company is included in the S&P 400 and Global 1200 Indices. It is also counted among the Fortune 500 and the Forbes Global 2000.

Funding Universe (2013) further states that Bed Bath & Beyond went public on the NASDAQ exchange in June 1992, trading at $17 per share. During that time analysts noted that, given the popularity of the merchandising concept that the company was excelling and their timing to go public was ideal. By May 1993, shares were trading around $32 as the company announced record sales for the year: $216.7 million in sales, with earnings of $15.9 million.

BBBY has several major retail competitors, including Walmart, Target, and JCPenney, as well as several mid-sized competitors like Pier 1 Imports (Wikipedia, 2019). In this report, I chose to compare BBBY performance with Target.

Target (TGT) is a discount retailer which generates revenue by offering competitively-priced consumer goods (Kuang, 2018). TGT is the fourth largest retailer in the United States, operating 1,556 stores in 47 states (Funding Universe, 2015). The first Target store opened in Roseville, Minnesota in 1962 while the parent company was renamed the Dayton Corporation in 1967.

According to Bhat (2018), BBBY shares crashed more than 23% in 2018 after its second-quarter results missed across the board. This is the lowest level of share trading for BBBY since year 2000. BBBY’s gross margins declined from 37.5% in 2016 to 34.1% in 2018, due to the increase in net direct-to-customer shipping expenses as the primary reason – which resulted from more promotional shipping activity (Forbes,2019).

2. Financial Analysis

2.1     Working Capital and Current Ratio

 

Working Capital:

Company	2018 (Thousands)	2017 (Thousands)
Bed Bath & Beyond	$18,05,393	$15,59,400
Target	-$637,000	-$717,000

Current Ratio:

Company	2018	2017
Bed Bath & Beyond	1.83	1.76
Target	0.95	0.94

A higher liquidity ratio shows a company is more liquid and has better coverage of outstanding debts. The working capital/current ratio is a debt measurement tool which measures the assets a company plans to use over the next 12 months with the debts it must pay during the same period (Tracy,2016).

The working capital is calculated by deducting current liabilities by current assets. A company with negative working capital is considered in a position of increased debt and thus have fewer liquid cash on them to do day-to-day operations. On the other hand, current ratio is determined by dividing current assets by current liabilities. A ratio of 1:0 is considered ideal because it means there is the exact amount of current assets available to pay off the current liabilities. But a ratio close to 3 indicates that the company needs to do better asset management.

The working capital of BBBY in 2018 has improved by 15.8% from 2017 and its current ratio has improved by 0.07 from 2017, whereas TGT has improved by 97.5% but it’s working capital is negative and its current ratio is also improved by 0.01. Thus, this indicates that BBBY is at a better position to pay off its short-term debts and it has enough liquid cash to run its day to day activities in comparison to TGT.

 

2.2 Inventory Turnover Rate

 

Company	2018	2017
Bed Bath & Beyond	2.89 times	2.62 times
Target	5.90 times	5.91 times

 

The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. (Inventory Turnover Ratio, n.d.)

Inventory turnover on the other hand means that the number of times a company sells and replaces its stocks of goods during a period. Higher the ratio, the better because it implies that the company is selling goods very quickly and that there is demand for their products. (Inventory Turnover, n.d.)

BBBY’s inventory turnover ratio in 2018 increased by 10.3% from 2017 whereas TGT’s ratio saw a downfall of 0.1% but the ratio is still higher than BBBY. Therefore, it indicates that BBBY demand for goods has improved from 2017 and it can sell off its goods almost thrice in a year but there is still scope for improvement in comparison TGT. This could be because of various reasons such as quality issues or less marketing of the brand.

2.3 Debt/Equity Ratio

 

Company	2018	2017
Bed Bath & Beyond	0.51%	0.54%
Target	0.98%	1.16%

The Debt/Equity ratio is used to evaluate a company’s financial leverage. It is also called the gearing ratio. It is calculated by dividing total assets by total liabilities. This ratio helps to gauge the extent to which a company is taking on debt as a means of leveraging its assets. A high debt/equity ratio is associated with higher risk, it means that the company has been aggressive in financing its growth with debt.

BBBY’s ratio has a percentage decrease of 5.55% in 2018 from the ratio in 2017 and TGT’s ratio has a percentage decrease 15.56% from 2017. So, this concludes that BBBY has been able to manage its debt better when compared to 2017 but also its ratio is less than its competitor TGT, it implies that the company has better demand for its goods compared to TGT which is keeping the ratio down.

2.4 Net Profit Margin

 

Company	2018	2017
Bed Bath & Beyond	3.44%	5.60%
Target	4.08%	3.93%

 

Net Profit Margin is equal to the profits divided by total revenue and represents how much profit each dollar of sales generates.

BBBY’s net profit margin has a percentage decrease 38.5% in 2018 in comparison to 2017, however TGT’s margin has a percentage increase by 3.7% in 2018. According to Nasdaq.com the decrease in margin is due to higher direct-to-customer shipping expense, lower merchandise margin as well as a rise in coupon expense on account of increased redemptions and increase in average coupon amount. This suggests that the company has tried to increase to increase the expenditure on sales but the return on investment has not been fruitful.

 

 

 

 

2.5 Return on Assets (ROA)

 

Company	2018	2017
Bed Bath & Beyond	6.03%	10.04%
Target	7.50%	7.13%

 

ROA is measured by dividing operating income by average total assets. It is an indicator of how efficient a company’s management is at using its assets to generate earnings.

ROA of BBBY has a percentage decrease of 39.9% in 2018 where as TGT’s ROA has a percentage increase of 5.2%. This concludes that every dollar spent on assets by BBBY gives a return of 6 cents in comparison to one dime in 2017 and every dollar spent on TGT gives a return of 7.5 cents in comparison to 7 (approximately) in 2017. Thus, BBBY needs to perform better to stay in competition.

 

2.6 Return on Equity (ROE)

 

Company	2018	2017
Bed Bath & Beyond	14.70%	25.19%
Target	25.00%	24.36%

 

ROE is calculated by dividing net income by shareholder’s equity. A ROE near the long-term average of the S&P 500 (14%) is considered as an acceptable ratio and anything less than 10% is considered poor (Return on Assets, n.d.).

BBBY’s ratio has a percentage decrease of 41.6% in 2018 from 2017 whereas TGT’s ratio has a percentage increase of 2.62% in 2018. Since both the ratios are above 14% it shows that both the companies are performing well but since BBBY’s ratio is less than TGT it indicates that they require a deeper dive into their management.

 

2.7 Earning per share

 

Company	2018	2017
Bed Bath & Beyond	3.04%	4.58%
Target	5.33%	4.7%

 

EPS is the net income applicable to share of common stock A high EPS indicates that the Company has more funds available to reinvest or to declare as dividend to stockholders (Investopedia, 2018).

On comparing we can see that BBBY has a percentage decrease of 33.6% whereas TGT has a percentage increase of 25.10%  which shows that BBBY have faced a downward trend and it needs to perform better.

 

 

 

3. Recommendation/Conclusion on Investment

 

After assessing the Financial ratios of Bed Bath and Beyond, I have concluded that I would not recommend investing in this company. Although the liquidity ratios have improved from last year but the profitability ratios have decreased which does not sound promising for the investors. Further according to the website www.investorplace.com BBBY shares are struggling since they at the lowest level since year 2000 which is triggering concern. Thus, I would recommend the shareholders to sell their shares before they incur further loses.

 

4. Bibliography

• Bhat, V. (2018). Bed Bath & Beyond crashes to its lowest level in 18 years after 2nd-quarter results miss across the board (BBBY). Retrieved from https://markets.businessinsider.com/news/stocks/bed-bath-and-beyond-earnings-results-miss-across-board-stock-18-year-low-2018-9-1027571353.
• Fidelity. (2018). 3 reasons to invest in stocks. Retrieved from https://www.fidelity.com/viewpoints/retirement/why-you-need-stocks.
• Forbes. (2019). Bed Bath & Beyond’s Challenges Likely To Continue Through 2019. Retrieved from https://www.forbes.com/sites/greatspeculations/2019/04/11/bed-bath-beyonds-challenges-likely-to-continue-through-2019/#7729eefb25ef.
• Funding Universe. (2013). Bed Bath & Beyond Inc. History. Retrieved from http://www.fundinguniverse.com/company-histories/bed-bath-beyond-inc-history/.
• Funding Universe. (2015). Target Corporation History. Retrieved from http://www.fundinguniverse.com/company-histories/target-corporation-history/.
• Kuang, C. (2018). Who are Target’s Main Competitors?. Retrieved from https://www.investopedia.com/ask/answers/051915/who-are-targets-tgt-main-competitors.asp.
• Learn Accounting and Finance Online for Free! (n.d.). Retrieved from https://www.myaccountingcourse.com/financial-ratios/inventory-turnover-ratio
• Momoh, O. (2018, November 11). Return on Assets – ROA. Retrieved December 2, 2018, from https://www.investopedia.com/terms/r/returnonassets.asp
• Tracy, J. A. (2016). Accounting for dummies. Hoboken, NJ: John Wiley & Son
• Staff, I. (2018, October 25). Inventory Turnover. Retrieved December 2, 2018, from https://www.investopedia.com/terms/i/inventoryturnover.asp
• Wikipedia. (2019). Bed Bath & Beyond. Retrieved from https://en.wikipedia.org/wiki/Bed_Bath_%26_Beyond.

Appendix

 

1. Graph showing the trend of BBBY’s stock price for a period of 5 years

 

 

 

2. Graph showing the trend of  TGT’s stock price for a period of 5 years

 

 

 

3. Bed Bath & Beyond Income Statement

4. Bed Bath & Beyond Balance Sheet 

 

5. Bed Bath & Beyond Cash Flow

 

 

6. Target Income Statement

 

 

 

 

 

7. Target Balance Sheet 

8. Target Cash Flow