The King of Towels Is Looking Sprightly

 | Nov 30, 2011 | 10:30 AM EST
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When I saw a YouTube video of women fighting over $1.28 towels at a Black Friday sale, I was reminded to look at the king of towels: Bed Bath & Beyond (BBBY).

Founded in 1971, and operating about 36 million square feet, Bed Bath & Beyond has become a powerhouse in the business of domestic soft goods. At the end of August, the company had 1,155 stores, including 986 Bed & Bath stores, 70 Christmas Tree Shops stores, 54 buybuy BABY stores and 45 Harmon locations. The company continues to outperform other retailers because of its simple, no-nonsense approach. Most investors believe this company is one of the best-managed retailers in the country, and all the hedge fund managers I know worship the stock.

Because of the company's "everyday low price" policy, Bed Bath & Beyond rarely runs sales and relies on word-of-mouth instead of expensive advertising.

Most of the company's growth over the last decade has come in the form of square footage growth. In the last three years the company has grown sales at a compounded annualized growth rate of 7.6%, surpassing the industry's average anemic 2% rate. Same store sales averaged 3.3% over the same period. Management loves to buy back stock and is in the midst of a plan to reduce shares outstanding by 5%.

In my opinion, Bed Bath & Beyond is attractive at the current price. Trading at about 13x fiscal 2013 estimates of $4.38, the stock is probably worth somewhere in the low $70s, or about 16x estimates. Sales should rise modestly into 2013 after jumping 12% in fiscal 2011 and about 7.5% in 2012. If you expect same-store sales in the 4%-to-4.5% range, a continuing benefit in operating margin from cost reductions (the company received a 220-basis-point boost in the September quarter) and a reduction in shares outstanding, it's fairly easy to get to my estimate. Instead of fighting over towels on Black Friday, check out these shares.

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