The durable competitive advantage is defined by the book when a company has sustainable competitive advantage over its competitors, i.e. long term advantage. This is called as having wide moat. Among other qualitative factors, whether or not a company has durable competitive advantage, is decided using quantitative factors such as return on invested capital, financial leverage, growth rate of equity, current market valuation, positive cash flows, liquidity ratios etc (Otuteye & Siddiquee, 2015).
For the company Bed, Bath & Beyond, Inc., Return on Invested Capital shows that it has remained in a healthy range of 21% to 26% during the last five year period. This is more than the industry average and indicates value in the business.
The equity growth rate on the other hand, has been very low and even negative year on year during the period. Similarly, EPS growth rate has also been low, although sales growth rate has always been positive during the five year period. This shows that the company is not very cost effective and efficient.
In terms of margins, while gross margin has remained range bound around the 40% mark which is considered to be a sign of durable competitive advantage, net margin has been very low around the 8% to 10% range, which is a sign of highly competitive industry. Free cash flow margin though, has always remained the minimum threshold of 10% thus indicating competitive advantage for the company.
As far as liquidity is concerned, while current ratio has been healthy at above 2 consistently, quick ratio has deteriorated considerably in recent times. The interest coverage too has been very volatile and lower than the threshold. The leverage levels are fine as the debt portion is very low.
In terms of market and other indicators, margin of safety is very high while Piotroski score is in between and Altman Z score is healthy. This indicates good long term financial health.
Overall, while the company may have short term competitive advantage due to some financial parameters, it does not seem to have durable competitive advantage due to low efficiency and lack of cost effectiveness.
References
Otuteye, E, & Siddiquee, M. (2015). Overcoming Cognitive Biases: A Heuristic for Value Investing Decisions. Journal of Behavioral Finance. 16(2): 140-149.
