Can Bed Bath & Beyond’s buybuy Baby Stores Help Drive Growth?

by Trefis Team
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Bed Bath & Beyond
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Bed Bath & Beyond‘s (NASDAQ:BBBY) buybuy BABY stores (BBY) account for the second most valuable business segment for the retailer and account for over 10% of its value. We believe that BBY is an essential part of Bed Bath & Beyond’s business because of its growth potential. The retailer acquired this business in 2007, and has expanded it at a rapid pace since then.

With its wide selection of product assortments and good customer service, buybuy Baby has made a name for itself. However, tough competition from specialty retailers such as Babies”R”Us, as well as falling birth rate in the U.S. can hinder BBY’s growth. With increasing price competition from retailers such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), buybuy BABY’s margins could also come under pressure. In the analysis below, we give an overview of buybuy BABY’s business, its growth outlook and the significance for Bed Bath & Beyond.

See our complete analysis for Bed Bath & Beyond

What Is buybuy BABY’s Business?

BBY is a children’s specialty retailer, offering over 20,000 quality products. [1] The main items offered include nursery and children’s furniture such as cribs, dressers, gliders, crib mattresses and bedding. The retailer also sells children’s accessories such as convertible car seats, booster seats, strollers, highchairs, pack-n-plays, swings and bouncers. Other products include health and safety items and clothing for preemies, infants and toddlers. Main customers at BBY stores are new and expectant parents as well as their relatives and friends. Since the products are targeted towards children, quality is of utmost importance.

Bed Bath & Beyond currently operates around 80 buybuy BABY stores across 26 states in the U.S. [2] It competes with similar specialty retailer such as Babies”R”Us, online retailers such as Amazon (NASDAQ:AMZN) and big-box retailers such as Wal-Mart and Target.

What’s Working In Favor Of buybuy BABY?

Since its acquisition in 2007, BBY stores have expanded at a higher rate compared to Bed Bath & Beyond’s other stores. During 2007-2011, BBY store count increased from 9 to 64. During the same period, the number of Chirstmas Tree Shops (CTS) increased from 41 to 71 and Harmon & Harmon Face Values’ store count increased from 40 to 45. Bed Bath & Beyond evidently believes that buybuy BABY has a significant room for growth considering the wide presence of rival Babies”R”Us’ that currently operates over 850 stores in the U.S.

Customer feedback suggests that rising preference to buybuy BABY over Babies”R”Us due to its wide product range and good customer service. The feedback also say that the store staff possess good knowledge about the products, which improves the shopping experience. Additionally, buybuy BABY provides maternal workout tips, product video and guides through its website. It also allows customers to make easy returns within 90 days in any of its stores, and it also notifies its customers if a product has been recalled due to safety issues. [3] These aspects have helped build buybuy BABY’s brand appeal.

However, The Road Is Tough

BBY’s target demographic in the U.S. has been shrinking for quite some time now. Demographic data show that due to persisting unemployment and sluggish growth in the U.S. economy, the birth rate has fallen from 14.18 in 2008 to 13.68 in 2012 (number of births/1000 population). [4] With couples having fewer children, the market for baby products is likely to be under pressure in the coming years. [5] The declining market size might encourage the company to initiate additional promotional activities to generate interest for BBY products in a competitive environment.

Moreover, BBY is competing against an established specialty retailer like Babies”R”Us in a niche market. Although the growth potential exists, if BBY expands aggressively in the regions where Babies”R”Us has strong presence, it risks triggering a head-on competition and a pricing war. This could have a mitigating effect on the retailer’s margins. On the other hand, if BBY explores new markets or regions untapped by Babies”R”Us, its expansion process will be slow. Additionally, these regions may not generate a high revenue per square foot. Increasing competition from retailers such as Wal-Mart and Target, who are expanding their product portfolio, is also a concern for BBY.

Significance For Bed Bath & Beyond

Although BBY’s revenue share is small, it has increased steadily over time. The brand accounted for just 1.2% of Bed Bath & Beyond’s total revenues in 2007. However, the figure increased to 6% in 2011 and going by the current trend, we expect it to reach 11% by the end of our forecast period. BBY stores are more productive than Bed Bath & Beyond’s namesake stores, World Market stores and Harmon & Harmon Face Values (HFV) stores. For instance in 2011, BBY stores generated average revenue of about $10 million per store, which is significantly higher than Bed Bath & Beyond stores’ $7 million and Harmon & Harmon Face Values stores’ $2 million.

We currently forecast buybuy BABY’s store count to reach 140 by the end of our forecast period. If we assume that Bed Bath & Beyond speeds up its expansion and brings the total to 200 by 2019, there can be 5% upside to our price estimate. However, this won’t be an easy task. [6]

Our price estimate for Bed Bath & Beyond stands at $69, implying a premium of about 20% to the market price.

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Notes:
  1. buybuyBABY []
  2. Bed Bath & Beyond’s SEC filings []
  3. buybuy BABY: What Makes It Different []
  4. Birth Rate, index mundi []
  5. Birth Rate In U.S. Down For Fourth Year In A Row, Huffington Post, Oct 3 2012 []
  6. Bed Bath & Beyond Announces All Cash Acquisition Of buybuy Baby, Bed Bath & Beyond, March 22 2007 []
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