3 Reasons Bed Bath & Beyond Could Soar

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After its most recent earnings announcement, Bed Bath & Beyond got a boost from the market. With sales rising faster than anticipated and earnings per share on the slow rise, the company is starting to look more like its old self. Over the last 12 months, the stock has fallen 15%, as poor results in the company's fourth and first quarters took their toll on the shares. Now the brand is looking like it has a plan in place once again, and now could be the perfect time to get in.

Of course, there's no way to predict the future and Bed Bath & Beyond's success depends on many, many moving parts. Given that, here are three of the reasons the brand might be on its way to a rebound.

Cash is looking strong
The key to running any business can ultimately be boiled down to one thing: cash. The cold, hard stuff is what makes a good business go round, and Bed Bath & Beyond is doing a good job managing its pile. In the first half of this year, the company generated free cash flow of $398 million, up from $365 million over the same period last year. 

That's given Bed Bath & Beyond the resources that it needs to make improvements to its operations. Notably, the company has been investing in its online channel in order to increase online sales and to integrate the physical and e-commerce sides of the business. In its last quarter, online and mobile sales grew by 50%. 

Bed Bath & Beyond has also used some of its cash to buy shares while they're down. In the first half, the company issued $1.5 billion worth of senior notes, allowing it to repurchase $1.3 billion worth of its stock. It spent about $1 billion of that in the second quarter alone, when the stock was trading just above $60 -- it's already back up to $66.

Comparable sales are on the rebound
While Bed Bath & Beyond's comparable-store sales for the second quarter weren't mind blowing, they were a step in the right direction. In the first quarter, the company only managed to grow comparable sales by 0.4%, while in this second quarter, comparable sales were up 3.4%. Beyond that, management said it's forecasting sales to increase between 2.6% and 3.1% for the full year. 

If the business can manage to keep sales up, then it might be on the way to regaining some of the brand value that has been lost recently. That would allow Bed Bath & Beyond to start getting more out of each sale, as it would have to offer fewer discounts to get customers through the door. Year to date, gross margin is currently down from the same period last year, but there seems to be some light on the horizon.

Finally, Bed Bath & Beyond is relatively cheap
With a P/E ratio of 13.75, Bed Bath & Beyond is well below many of its competitors. While that's not pushing the stock into Value territory, it's still less expensive than many retailers, which tend to congregate around a P/E of 20. With growing sales, a solid cash flow, and a path to growth, Bed Bath & Beyond has the potential to grow well beyond its current price.

The challenges ahead are reflected in that low price, though. Bed Bath & Beyond needs to have some sales success in order to stabilize its gross margin and get itself out of the promotional trap. In order to do that, it's going to have to spend money on marketing and store refreshes. That could cut back on the free cash the company has to buy back shares or make other investments. It also doesn't pay out a dividend, meaning the whole of its value rests on its ability to make the market a believer.

Those challenges are real, but with its clear plan and stack of resources, Bed Bath & Beyond has a clear path to success. Investors who get in early could be well rewarded when Bed Bath & Beyond completes its transformation.

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The article 3 Reasons Bed Bath & Beyond Could Soar originally appeared on Fool.com.

Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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