In terms of revenues, Bed Bath & Beyond‘s (NASDAQ:BBBY) Christmas Tree Shops stand second to the retailer’s namesake stores. In 2011, this segment accounted for about 15% of the retailer’s revenues.  However, the contribution to gross profits was less than 10% as we have estimated lower margins for Christmas Tree Shops compared to Bed Bath & Beyond’s other businesses. Gross Mmrgins for Christmas Tree Shops are around 27% compared to 44% for the retailer’s other segments. 
We believe that this segment is an essential part of Bed Bath & Beyond’s business despite its lower cash flows, and has good growth potential. The retailer acquired Christmas Tree Shops in 2003 and its revenue contribution has been increasing since then.  With their attractive pricing, Christmas Tree Shops add a bargain store to Bed Bath & Beyond’s arsenal. In the analysis below, we will discuss Christmas Tree Shops’ business and its significance for the retailer.
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What Is Christmas Tree Shops’ Business?
Christmas Tree Shops (CTS) are bargain stores offering household furnishing, home decor and gift items. As the name suggests, these stores also sell Christmas decorations during festive season as well as other seasonal items. As is the case with Bed Bath & Beyond’s other business segments, improving shopping experience is of prime importance in these stores. This is why most CTS stores resemble older buildings in colonial and Victorian architectural styles.  With a unique name for a discount store, and an architectural theme, Christmas Tree Shops provide customers with a fun experience. The original Christmas Tree Shop at Cape Cod, Massachusetts used to be a landmark and must-see destination for visitors in the area.
Bed Bath & Beyond currently operates around 74 Christmas Tree Shops in the U.S. mainly across the East Coast.  It competes with retail discount stores such as Dollar Tree as well as household furnishing stores such as Kirkland’s and TJX Companies’ Home Goods stores.
Significance For Bed Bath & Beyond
Christmas Tree Shops constitute about 10% of Bed Bath & Beyond’s value according to our estimates. The retailer operates a very small number of CTS stores concentrated in a few states. Being a discount store, we estimate its margins to be lower than the retailer’s other segments, and similar to Wal-Mart (NYSE:WMT) and TGT (NYSE:TGT).
However, looking deeper into the important metrics, we conclude that the outlook for CTS is positive. Bed Bath & Beyond acquired Christmas Tree Shops in 2003, and this business has grown rapidly since then. In 2005, CTS shops contributed just under 10% to the retailer’s revenues, which increased to around 15% in 2011. Although this figure came down in 2012 with the acquisition of World Market Stores, the increase is likely to continue going forward.
Christmas Tree Shops generate more revenues than all other segments combined (apart from Bed Bath & Beyond stores) and have the highest productivity. For instance in 2011, these stores generated average revenue of about $20 million per store, which is significantly higher than Bed Bath & Beyond stores’ $7 million and buy buy Baby stores’ $10 million. 
According to Bed Bath & Beyond, it acquired CTS to expand its portfolio by adding a unique concept business.  Most of CTS merchandise are developed within the stores and have a unique appeal associated with them.  The compelling product mix at attractive prices along with enticing store design have contributed to CTS’ success, which is reflected in the aforementioned metrics. Moreover, given CTS’ success and limited presence in U.S., it has huge expansion potential.
Our price estimate for Bed Bath & Beyond stands at $69, implying a premium of about 25% to the market price.Notes: