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Bed Bath & Beyond Inc. (BBBY): Time to Buy This Value Stock?

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Investing in stocks is a bit like a visit to an auction. Some people enjoy paying a premium for what is in fashion so they can sell it on to someone more excitable than themselves, others enjoy buying a quality item at a reasonable price, and there are those that enjoy buying anything because it’s cheap.

Bed Bath & Beyond (BBBY)And then there are those who kind of think something is fashionable, the item is cheap, and they can overlook some flaws in the product while hoping that others will do too. This article is about the last group and why they might love a stock like Bed Bath & Beyond Inc. (NASDAQ:BBBY).

Bed Bath & Beyond Inc. (NASDAQ:BBBY) ticks some boxes

Yes, it is a housing-related play and yes, on a forward PE of 12, the stock is cheap. On the other hand, this company has exhibited rather less than stellar performance over the last year, as margins have fallen while comparable same-store growth is in low single digits at best.

Only last quarter, the company was forecasting same-store sales growth to be in the 2%-4% range, but they came in at 2.5% for Q4. Moreover, it is relying on growth from a couple of acquisitions which have actually reduced margins. My sense is that there are better stocks in the ‘housing franchise’, but as one of those people above who only want to buy quality, this isn’t the sort of stock I can fall in love with anyway.

Whether you buy value or growth, I think it’s fair to say that the prospects of this company depend more over its execution than a continuation of its immediate past. The company has been subject to increasing competition in the sector, and is seen as the primary loser due to Amazon.com, Inc. (NASDAQ:AMZN)‘s  move into the home goods space.

Not only does Amazon.com, Inc. (NASDAQ:AMZN) retail home goods through its core sites, but it also owns the parent company of casa.com, and the latter appears to be taking direct aim at Bed Bath & Beyond Inc. (NASDAQ:BBBY)’s market. Amazon has the scale to be able to hurt its rivals.

Here is a look at Bed Bath & Beyond Inc. (NASDAQ:BBBY)’s margins and possibly at how Amazon has effected it.

I’ve included a bar chart of the year on year movement in operating margins in order to better illustrate the situation. It doesn’t make pretty reading, and there is a sense that the company needed to make the World Market and Linen Holdings acquisitions in order to deal with encroaching competition.

The industry fights back

The threat from Amazon has certainly spurred the incumbent players to respond. And frankly, not an earnings report goes by without one of them announcing a step up in capital expenditures in order to expand e-commerce offerings.

For example, Pier 1 Imports Inc (NYSE:PIR) recently announced that it would be rolling out a point of sales (POS) system and fully integrate it with its e-commerce facility. Pier 1 Imports Inc (NYSE:PIR)’s plan is to continue to offer in-store pick up for its online customers, while trying to differentiate its offering from the competition.Will it continue to do this successfully in the future and/or does it run the risk of cannibalizing its retail sales? That remains to be seen.

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