One of the largest specialty retailers in the U.S., Bed Bath & Beyond (NASDAQ:BBBY), has a wide reach with over 1,300 stores across U.S., Puerto Rico and Canada.  The retailer generates the majority of its revenues through its namesake stores, which offer domestic merchandise and furnishing items. Apart from these, the retailer operates other businesses through buybuy BABY, Christmas Tree Shops, World Market and Harmon & Harmon Face Values stores.
The retailer has a strong presence in the U.S. market with limited competition. The shift in consumer preference from department stores to specialty stores, and the improving housing industry in the U.S. will work in the retailer’s favor. Bed Bath & Beyond is also taking steps to strengthen its online channel, where it’s relatively weak at the moment. Lastly, the retailer’s decentralized management system helps in adapting to the needs of customers, which increases its product appeal. This analysis is to understand the above factors that can drive Bed Bath & Beyond in the future.
Bed Bath & Beyond Strengthens Its Position
During the recession of 2008-2009, Bed Bath & Beyond’s only pure-play competitor, Linen ‘n Things, filed for bankruptcy. Linen ‘n Things, shut over 500 stores in 2008, after holding a liquidation sale, which positively impacted Bed Bath & Beyond’s revenues. In 2009 and 2010, Bed Bath & Beyond witnessed a strong rebound in comparable store sales and average revenue per square foot. A large part of the increase can be attributed to fewer retailers specializing in the linens and home furnishings segment. We expect Bed Bath & Beyond to maintain its leadership in the market in the near future.
The retailer recently added Cost Plus’s World Market stores to its portfolio to increase the variety of its overall product offerings. World Market stores offer private label (World Market) brands, which have distinct design, good quality and are not available in regular department stores. A significant number of its products, including collectibles and jewellery are handcrafted and bought from different parts of the world, which makes them exclusive. 
Bed Bath & Beyond’s acquisition will help the retailer in attracting more customers and also strengthen its brand image. Moreover, this will limit competition (Cost Plus was previously a competitor) and grant the retailer a competitive advantage over other specialty retailers and department stores.
Consumer Preference Is Shifting From Department Stores To Specialty Stores
Consumers in the U.S. are increasingly shopping at specialty stores. These stores offer attractive prices and a wide variety of products, whereas department stores offer a limited product range for home furnishings. In 2008, trailing twelve months (TTM) revenues for specialty stores such as Bed Bath & Beyond, Kirkland’s, Pier 1 Imports and traditional stores such as JC Penny and Sears were roughly the same. Since then (measured as of September 2012), while TTM revenues for Bed Bath & Beyond have increased by 30%, they have decreased for JC Penny and Sears by 15% and 20% respectively.  This is assuring for specialty stores such as Bed Bath & Beyond.
Improving Housing Industry Can Help Bed Bath & Beyond
Bed Bath & Beyond’s sales are largely related to consumer spending on home furnishing, which is directly influenced by the state of the housing industry. The U.S. Department of Commerce recently reported that the housing starts in the U.S. increased by 3.6% in October 2012.  The number of new households in 2012 is now expected to be somewhere around 894,000, the highest figure in the last four years.  The sales of previously owned homes also improved significantly and was the highest in the past six years. 
This improvement can be attributed to the gradually improving economy and more people looking to buy houses.  This phenomenon implies that customer traffic to Bed Bath & Beyond’s stores and the average spend per customer could increase.
Initiatives To Improve E-Commerce
In an era when online shopping is gaining tremendous popularity, retailers must possess a strong e-commerce channel in order to remain competitive. Although Bed Bath & Beyond launched its e-commerce channel a long time ago, it hasn’t proven to be a valuable contributor historically. The retailer is ranked quite low in the e-commerce segment, and its online sales contributes just about 1% to its net sales. 
A few months ago, Bed Bath & Beyond announced its plans to redesign its web portal and set up a new distribution center as well as an IT data center in order to improve its online sales.  Although these steps seem to be in the right direction, it will take a while before this channel generates substantial sales. For instance, if we consider the upcoming plans for the online channel, the retailer’s capital expenditures are likely to be around $300 million in fiscal 2012, which includes the new distribution and IT data center.  Assuming that the online sales are doubled due to this addition and adjusting the forecast in our pricing model accordingly, we get upside of less than 5% to our stock price estimate.
Our price estimate for Bed Bath & Beyond stands at $69, implying a premium of about 25% to the market price.Notes:
- Bed Bath & Beyond’s SEC filings [↩]
- Cost Plus’ SEC filings [↩]
- Specialty Stores Will Dominate The Next Decade, The Motley Fool, Sept 10 2012 [↩]
- U.S. housing, Economist, Nov 21 2012 [↩] [↩]
- Steady US housing recovery is boosting economy, Businessweek, Nov 19 2012 [↩] [↩]
- Bed Bath & Beyond will build out its web infrastructure in 2012, Top 500 Guide Online [↩]
- BBBY Retains Neutral Rec-Analyst Blog, NASDAQ, Oct 23 2012 [↩] [↩]