Dear Mr. Berko: In November 2008, you told me not to buy Bed Bath & Beyond. It was selling in the low $10s at the time. Well, I bought 300 shares anyway at $18 to help my daughter pay for our grandson's schooling at Duke. The shares were at $80 late last year. Now they're down a lot from that, and my stockbroker wants me to buy 300 more shares. He thinks that right after the new president is inaugurated, sales will increase. He says that the board of directors will raise the dividend by 20 percent, to 60 cents a share, that consumer retail sales will boom in 2017, that management plans to open 24 new locations annually and that the stock price could go back up by 30 points and maybe even go to over $80 a share, where it was a few years ago. If that's the case, he believes Bed Bath & Beyond will split 3-for-1. My broker knows several people in the company's executive office and seems to be very knowledgeable about this company. Please tell me whether you think I should buy 300 more shares. — BR, Charlotte, N.C.
Dear BR: Ouch! I was as wrong as Corrigan back then. And I was properly taken to the woodshed by several readers for that egregiously bad advice. Since you bought Bed Bath & Beyond (BBBY-$38.12), it rose to $80 a share, earnings have tripled, return on equity has nearly doubled, the number of locations has increased from 1,037 to 1,550 and management has repurchased over 100 million shares. And this year, BBBY paid its first dividend (50 cents) since coming public. That's impressive, but I think your broker is floating on moonbeams.
All of the above was eight years in the making, and even BBBY's most enthusiastic optimists (whose numbers are surprisingly legion) doubt that management can come close to repeating that performance. Management would have to pull a Wells Fargo to meet those numbers again. Your broker may have a lot of knowledge about Bed Bath & Beyond that isn't accurate, though he hopes it will be so.
I enjoy perusing the large variety of fabulous merchandise in a BBBY store, but I can't recommend a purchase of another 300 shares. Rather, you should have followed my advice over a year ago to sell BBBY when it was trading in the $60s. As I recall, this money was for your grandson's college tuition at Duke in the fall of 2017.
The bloom has been off the rose for some time. And that's reflected in a 50 percent drop in BBBY's stock price during the past 18 months. Home goods retailers, along with other bricks-and-mortar retailers, are hurting, and now some of that hurt is reflected in BBBY's income statement and balance sheet. Margins are falling. Same-store sales are declining. And though BBBY's stores continue to be profitable, they are becoming increasingly less profitable. During the past few years, return on capital and return on equity have fallen 20 percent and 17 percent, respectively. Operating margins have slipped from 18 percent to 13 percent, and net profit margins have tanked every year since 2011, from a high of 10.4 percent to an expected 5.7 percent this year. And they're expected to decline again next year. It doesn't end there! Recent wage pressures are adding to management's problems, plus the fact that 80 percent of BBBY's products can be found on Amazon.com at lower prices.
I think BBBY's share price could move lower, even though Ned Davis Research, Morningstar, Argus Research and Standpoint Research have "buy" recommendations on the stock. Take a glimpse at the 2016 selling transactions of BBBY's officers and directors. They've sold over 1.3 million shares this year.
Because your grandson will need that tuition money a year from now, I urge you to sell BBBY and lock in your still-significant gain. As you know, that gain could have been more significant at $69. And though unanticipated events or changing circumstances could cause BBBY's price to rise, the old proverb that "a bird in the hand is worth two in the bush" is compelling advice.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.