Bed Bath & Beyond (NASDAQ:BBBY) is scheduled to release its Q4 fiscal 2013 earnings on April 10. The retailer’s comparable stores sales increased by an average of about 3% during each of the first three quarters. This trend is likely to continue on its strong market position, the improving housing industry and shifting consumer preference from department stores to specialty stores. However, the weak holiday season in the U.S. might have a mitigating effect. Although the U.S. online retail market is growing fast, Bed Bath & Beyond may not see any significant impact as its e-commerce channel still accounts for a very small fraction of its overall revenues.
Improving Housing Industry Can Help
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. Lately, there has been a surprising increase in home demand. A real estate broker in Sacramento states that he has not seen such low house inventories in the past 27 years.  Last year, the U.S. Department of Commerce reported that the housing starts in the U.S. increased by 3.6% in October 2012.  The number of new households in 2012 was 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 were the highest in the past six years. 
This improvement can be attributed to the gradually improving economy and more people looking to buy houses.  Therefore, we expect Bed Bath & Beyond’s customer traffic and average spend per customer to increase.
Bed Bath & Beyond’s Strong Market Position
Bed Bath & Beyond enjoys a strong position in the market due to its wide variety of products and relatively lower competition. 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.
Last year, Bed Bath & Beyond added Cost Plus’s World Market stores to its portfolio to expand its overall product offerings.  World Market stores offer private label (World Market) brands, which have a distinct design, are of good quality and not available in regular department stores. A significant number of its products including collectibles and jewelry are handcrafted and bought from different parts of the world, which makes them exclusive.  Bed Bath & Beyond’s acquisition will help the retailer attract more customers and also strengthen its brand image. Moreover, this will somewhat limit the competition (Cost Plus was previously a competitor) and grant the retailer a competitive advantage over other specialty retailers and department stores. We expect these factors to have a positive impact on the retailer’s Q4 results.
Customer Preference Shifting To Specialty Stores
A specialty retailer offers a wider range of products at attractive prices whereas in department stores the product range is often limited. This makes customers more likely to go to a specialty store than any other store when it comes to shopping for home furnishing products. Moreover, Bed Bath & Beyond has been outperforming other specialty retailers with its diverse product range and attractive discounts. In 2008, trailing twelve months (TTM) revenues for specialty stores Bed Bath & Beyond, Kirkland’s, Pier 1 Imports and traditional stores 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 an encouraging trend for specialty stores such as Bed Bath & Beyond.
However, Weak Holiday Season & Low Proportion Of Online Sales Will Weigh On The results
The U.S. witnessed its weakest holiday season since the recession due to hurricane Sandy, and the payroll tax increase further added to the problem.   This impacted sales of a number of retailers in the U.S. and we believe that Bed Bath & Beyond’s financial results will also show the effect.
In an era where online shopping is gaining tremendous popularity, Bed Bath & Beyond relies on its physical stores for 99% of its revenues. Although the retailer launched its e-commerce channel a long time ago, the revenues still remain insignificant. Bed Bath & Beyond is ranked quite low in the e-commerce segment. This clearly suggests that the retailer is missing out on a substantial growth opportunity that is not limited to any specific company. 
Our price estimate for Bed Bath & Beyond stands at $69, implying a premium of about 10% to the market price.Notes:
- Sudden Rise In Home Demand Takes Builders By Surprise, The New York Times, March 20 2013 [↩]
- U.S. housing, Economist, Nov 21 2012 [↩] [↩]
- Steady US housing recovery is boosting economy, Businessweek, Nov 19 2012 [↩] [↩]
- Linen ‘n Things files for bankruptcy, Reuters, May 2 2008 [↩]
- Bed Bath & Beyond’s SEC filings [↩]
- Bed Bath & Beyond Inc. Reaches Agreement To Acquire Cost Plus Inc., Bed Bath & Beyond, May 9 2012 [↩]
- Cost Plus’ SEC filings [↩]
- Specialty Stores Will Dominate The Next Decade, The Motley Fool, Sept 10 2012 [↩]
- U.S. retailers scramble after lackluster holiday sales, Reuters, Dec 26 2012 [↩]
- Retailers Fear Payroll Tax Will Cut Consumer Spending, The Wall Street Journal, Jan 13 2013 [↩]
- Bed Bath & Beyond will build out its web infrastructure in 2012, Top 500 Guide Online [↩]