BBBY

Investment Notes

 

 

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April 6, 2006                              Glad we are no longer short

        Earnings came out yesterday for BBBY.  They were quite positive.  I am thankful we covered our short position in February.  Share count is expected to be 288M at 53 week year end 2/07.  I ran several quick  analysis like the one below, and not a heck of a lot has changed.  If I am not mistaken, book value is reduced from below, to $7.86 per share.  I have not dug deep into this. I suspect the lower book value is a result of stock buy-backs.  I could be wrong.  If you are reading this, please understand that BBBY is not a focus, and much of what I write here is merely for my possible future references.

 

 

       

 

 

The 10K when filed will give greater info.

 

February 14, 2006  Some Valuation Adjustments

1.    I was working with valuations over the last few days.  I am beginning to think that my BBBY concerns are not as great as my fear of a rising stock price.  That is always the possibility when short selling.  I used some bad case scenarios below, and annualized return using these scenarios were still in excess of 6% in 15 years.  At this point, I will begin to eliminate our short position.  Part of my thinking is that there will be problems in the industry, and that the company may be aggressive on capitalization of assets.  Perhaps this is the reason for low inventory turns.  Nevertheless, management seems relatively honest and those paranoid concerns have not overridden my desire to cover our short position.

I successfully eliminated our short position at 36.48

 

 

 

 

 

February 10, 2006  Some notes on 2/10/06 Value Line.

1.    Lowered Timeliness rating to 2 on 12/30/05, and lowered Technical to 4 on 2/3/06.  Big deal, I never look at that stuff anyway.

2.    Projects the following for F2006

 

 

3.   Extrapolating some value from above.  This should not be relied upon, I was merely performing some "back of the envelope" analysis.   There are several ways I can extrapolate some value from the above.  Keep in mind, that I find the above expectations to be on the high side of what I expect to happen.  I think growth rate will be in the 12% range.  I also wouldn't be surprised to see margin pressure, perhaps bringing down earnings to $500M range.  Hence, I will use 2 scenarios.

 

 

 

         I revisited some of my reasons for entering the short, be it , at a price around $41.58.  Let me list them again, and then comment.

        1.    Inventory turns -    These remain a concern for me.  Scan below, see concerns, and at the same time consistency by BBBY.  Metrics recently had difficulty, but that could be a short term movement that has no bearing on companies continued operations.

        2.    cooling housing market - still a thesis.

        3.    earnings management? -  perhaps buyback is based on meeting eps.  Perhaps eps will be up and net income down, due to reduced share count.  Just speculation, and not a great emphasis in my short thesis.  Management has always been honest and excellent, but again, the skeptical part of me thinks the possibility of expenses being capitalized.

        4.    consumer retrenchment -  I still believe that American consumer will have a revolutionary shift from drunken spenders to massive savers.

 

        So, what does the above tell me?  Not a gosh darn thing.  Of course if the high scenario works, I do not want to be short, and would even consider a long.  Yet, I hardly expect the high side scenario to occur.  As I dwell on this, the reality is, that I really don't expect the middle scenario to occur.   Going out 10 or 15 years is semi-absurd.  Yet, it does build a road map.  My gut is thinking that history will show us a level between "medium and low expectations."  If that were to happen, it looks like annual ROI would be in the area of 3 to 5%.  For now, I remain short.

        It will be interesting to see what share buyback does to cash balance.

 

 

 

January 6, 2006  Some notes and follow-ups (35.24)

1.    I spoke with BBBY about my concerns on inventory turnover and potential outside manufacturing, guarantors, etc.  I previously discussed this on December 23, 2005 .  The following are notes I took during our discussion.

        A.    The premise of BBBY business and model is for customer service and readily available inventory.  BBBY claims that the inventory turns will be reduced with this type of strategy.  Again, I reiterate that turns under 2.70 have been historically common for BBBY (at least since 1999).

        B.    Under no circumstances does BBBY, CTS or Harmon guarantee any debt for entities that manufacture for BBBY.  I asked if there were any minimum guarantee purchases by BBBY from these manufacturers over a long period of time.  BBBY mentioned on several occasions that purchase guarantee obligations are typically on an order by order basis.  They claimed that typically, but not always, the guarantee obligations are short term in nature and never exceed a long period of time.  They stated that under no circumstances are they affiliated with the manufacturer, they do not act as guarantors of any manner to the manufacturers creditors and in all cases the manufacturer also supplies other customers which are not affiliated with BBBY.

        C.    I asked BBBY why they used to mention an $80B home goods market, and now mention a $100B home goods market.  BBBY claimed that this is a Wall Street number, and they are merely repeating such a number.  This sounded odd to me, yet not that big a deal.  If you read the conference call transcripts, you will see that BBBY clearly uses this metric and does not indicate that the number is a "wall street number."

        D.    I asked about the recent change of Ron Curwin from CFO to Investor relations.  I asked if Mr. Curwin was cool with the change.  IR was very clear in mentioning that Mr. Curwin was very happy with the change.  They mentioned that he is 75 years old, and wants to focus elsewhere.  I was cool with that response.

        E.    I asked about the change in "Other Current Assets", which increased from $93.5M on February 26, 2005 to $147.6M on November 26, 2005.  IR said they weren't sure and would get back to me.  I have not examined this in detail. Could just be a typical pre-paid, or it could be the beginning of a future recognized expense.  The difference is $54.1M or $0.16 per share.  As I look at 10Q for 8/27/05, I noticed that the big change occurred this quarter.  "Other Current Assets" increased by $33.3M this quarter.  Something to keep an eye on for quality of earnings analysis.  This is not necessarily a problem, just something to look at.  It could be a seasonal issue. 

                IR did get back to me on the "Other Current Assets", they mentioned it was seasonal and mostly prepaid advertising.  I would really have to analyze going back to this period each year to verify that statement. I trust that IR response is accurate, my gut says it is.  Keep in mind, this will be an expense as the costs are recognized on the Profit and Loss statement.

 

2.    IR said that increased costs since Katrina, continue to have a "residual effect."

3.    I asked IR if their earnings guidance from December 22, 2005 , incorporated projected reduction in share buy-backs.  Interestingly enough, IR mentioned that the reduction was incorporated into the guidance.  Why is that interesting?  The reason being, that Net Operating Income could actually go down from last year, and eps at the same time could increase because of lower share count.  Isn't accounting fun?  Are you confused yet?  Nahhhhhh (think sheep).

 

 

December 23, 2005  Quick Metrics (these have not been fully reviewed)

Total Quarterly Revenues
	Q1	Q2