Booth Laird’s 2Q 2014 Newsletter provides updates on in and their most most recent investment – Bed, Bath, & Beyond (BBBY) General Motors Company (NYSE:GM) and why Bed Bath & Beyond Inc. (NASDAQ:BBBY) reminds Jonathan Booth of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B).
Jonathan Booth update on General Motors
- The stock price dropped further after our Q1 2014 Newsletter from $34.11 to as low as $31.93, at which point we bought even more GM TARP Warrants (deep-in-the-money General Motors Company (NYSE:GM) stock options that expire in 2019). The stock has since rebounded to $37.58 as of close of business yesterday.
- Despite the pullback this year, we are still up 30% on the GM stock and up 66% on the GM TARP Warrants we purchased in 2013. We are also up 19% on the GM TARP Warrants we purchased earlier this year on the pullback.
- The independent investigation regarding the delayed recalls was completed and the results released publicly. As we confidently felt would be the case, the delay was due to good old fashioned incompetence rather than a vast conspiracy to cover up less than 50 crashes among over 90 million General Motors Company (NYSE:GM) cars on the road at any given time.
- GM announced a compensation plan for crash victims to be managed independently and without financial limits by Kenneth Feinberg, the attorney and crisis expert who also aided victims in the aftermath of 9/11 and the Boston Bombing. As we predicted based on prior court cases and settlements, the payout per person is likely to be $10M or less.
- General Motors Company (NYSE:GM) has expanded the recalls to over 29 million vehicles for model years as far back as 1997 as the company continues to go way above and beyond to ensure it clears its name. To date, less than 20 fatalities are linked to recalled vehicles, and, while tragic, not all fatalities can be confidently attributed to a defect in the vehicle.
- Despite the increasing number of recalls, General Motors Company (NYSE:GM) has posted three consecutive months of higher than expected sales growth results. As we noted in the last newsletter, consumers have short memories unless directly impacted. It helps that General Motors is not the actual brand name of any vehicles, helping to avoid a negative association with the actual U.S. brand names of Chevrolet, GMC, Buick, and Cadillac. Anecdotally, dealers are also taking the opportunity to sell new General Motors Company (NYSE:GM) vehicles to consumers bringing in their old GM vehicle for a recall notice. Even more impressive, this success has been achieved despite price increases well above the industry average.
- We have adjusted down our exit price to account for the cost of the additional recalls, but that exit price still exceeds the current market price.
Jonathan Booth: Venture Further into the Unloved – Retail
Few industries are as unloved by the stock market as retail at the moment. While the S&P 500 continues to set new highs, many retail companies are hitting 52-week lows. Certainly, much of it is deserved as many retailers respond to competition from e-commerce by cutting costs and staff to the detriment of the shopping experience, driving even more people to shop on Amazon.com, Inc. (NASDAQ:AMZN) or Overstock.com, Inc. (NASDAQ:OSTK). We have seen the toll that the internet can take on brick-and-mortar stores, such as the collapse of Blockbuster and Borders and the decline of shopping malls and big box electronics stores.
So imagine my surprise when I came across a retailer that has experienced 21 years of uninterrupted revenue growth while maintaining high gross and operating margins, high returns on invested capital, no debt, and positive free cash flow even as e-commerce was born, took off, and toppled many a competitor. It was not some tucked away retailer in a high end area that protects it from e-commerce but instead a retailer with 1,500 locations nationwide and counting that sells quality goods at reasonable prices with exceptional customer service and a great shopping environment. The retailer was Bed Bath & Beyond Inc. (NASDAQ:BBBY). Despite knowing the poor fortunes of brick-and-mortar retail, we could not pass up an opportunity to look into a company which had just hit a new 52-week low, down 22% on the year, and available at a 10% free cash flow yield ex-cash.
As I read through the latest annual report and latest earnings call transcript and reviewed the investor relations section of the website, it struck me that Bed Bath & Beyond Inc. (NASDAQ:BBBY) reminds me of another well-run company you may have heard of – Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), helmed by Warren Buffett and Charlie Munger.
Why BBBY reminds Jonathan Booth of BRK
- Both have two 75+ year old men leading the company, each of whom has held that position with the company for at least 40 years.
- Both companies prefer to promote from within and command strong employee loyalty. Bed Bath & Beyond Inc. (NASDAQ:BBBY)’s executive team outside of the co-chairmen/founders have been with the company for a minimum of 18 years on up to 43 years, which happens to be how many years ago the company was founded. BRK has a stable of managers leading its many businesses, many having founded their respective businesses before being acquired by Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B).
- Neither company panders to Wall Street. Both do not participate in any investor conferences of any kind, issue very few press releases (BBBY had 4 press releases in 2013, one for each earnings call), have sparse investor relations websites, and have no “investor presentation” slide deck or fact sheet of any kind. The track record of both companies affords that privilege in my view.
- Neither one has issued a dividend for at least 30 years (surprisingly, BRK is the only one of the two to have ever issued a dividend), instead preferring share buybacks when warranted. BBBY has returned 90% of its operating cash flows to investors the last two years via buybacks. As you know, we prefer buybacks to dividends if the stock is undervalued.
- Both are focused on fostering the appropriate corporate culture throughout the organization. BBBY store employees and store quality are a testament to this.
- Both are proponents of decentralization.
- Both dislike debt and love cash. Bed Bath & Beyond Inc. (NASDAQ:BBBY) has maintained a substantial net cash position for at least 22 years. Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) carries a good bit of debt, but it is well supported by its assets and cash flows. BRK keeps a minimum of $20 billion in cash for “peace of mind” in any case.
- Both have achieved a consistent record of high returns on capital invested well in excess of each company’s cost of capital (re: growing shareholder value every single year).
- Neither one conducts a typical earnings call. BBBY does not accept any questions on its calls, and BRK does not conduct one at all.
- Both lead off the annual report with a snapshot of the company’s impressive track record under current management. BRK shows 50 years of BRK performance versus the S&P 500. BBBY shows 22 years of fairly detailed financial data, including revenue (21 years of uninterrupted growth), gross profit, operating profit, net income, store count, square footage, same store sales growth, and some balance sheet line items.
The company’s track record, of which the last 22 years are conveniently provided on the first two pages of the annual report, speaks for itself. The company has grown from 38 stores in 1993 to 1,496 stores in 2014, only 1,014 of which are actual Bed, Bath, and Beyond stores. The rest are comprised of Harmon Health and Beauty (acquired in 2002), Christmas Tree Shop (acquired in 2003), buy Baby (purchased in 2007), and Cost Plus World Market (purchased in 2012). Bed Bath & Beyond Inc. (NASDAQ:BBBY) also purchased Linen Holdings, a B2B business with no store front, in 2012. The company has also grown comparable sales per store nearly every year over the last 21 years. Revenue CAGR over the last 21 years was 20.8%, which dips down to 9.9% over the last 10 years and 9.8% over the last 5 due primarily to starting with a much higher base in the last decade. That growth can be broken down into two parts: 1.6% over the last 21 years from growth in sales/square foot (2.1% over the last 10 years and 3.7% over the last 5) and 19.2% over the last 21 years from growth in overall square footage (7.8% in the last 10 years and 6.1% in the last 5 years).
The company has remained highly profitable throughout that time on all metrics: ROE has averaged 25.3% over the last 21 years (22.6% over the last decade increasing to 23.1% over the last 5 years and 25.5% over the last 3 years) and ROIC has averaged an outstanding 38.5% over the last 21 years due to net cash reducing the invested capital base (39.0% over the last decade and 38.5% over the last