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Current Strategies Essay

Initiation of Coverage: High P/E ratio: 42. 80  Stock Price per share: $27. 38 Networking Capital sufficient to fund future growth/expansion: 1990: $9,359; 1991: $15,593, 1992: $31,955, 1993: $34,501; 1994: $54,432 BUY Rating: o Balance sheet can finance growth required to justify stock price and P/E ratio: sufficient cash, can still increase leverage Why Buy? Even though the stratospheric P/E multiple of 37 makes us carefully consider the risks of owning BBBY, we still feel that this is a company that you should own for at least the next several years.

BBBY is a fundamentally strong investment with an ROE of 33. 18%. Everything about BBBY’s retailing business seems to be holding its strength even under the strain of their rapid growth. As you can see below, even though sales is growing at a 30% + clip it is still managing to outpace BBBY’s COS and sustaining their healthy Gross Profit Margin of 40%. In the graph above we can see that BBBY’s sales per sq. ft. remains stead y in the face of massive square footage increases.

In addition to that same store sales grew at an amazing 10. 6% this year. BBBY has announced plans to grow their stores by

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30% a year for the next three years. With $35 million currently in Retained Earnings and a credit line of $20 million available to them, they have adequate capital to carry out these plans. Given that BBBY’s store growth has a 97% correlation to growth in the Net Earnings we are confident that these store openings will have a positive effect on BBBY’s financials.

There is one issue to watch however. As is the case with most retail growth stories there is the possibility that keeping up this incredible pace could affect BBBY’s margins. Keep an eye out to make sure that BBBY isn’t growing sales by increasing advertising expenses, adding middle management, or engaging in price wars with competitors. We feel secure in saying that the BBBY model is less suseptable to pitfalls such as these given their model and past history of mainting costs while growing.

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