Bed Bath & Beyond (NASDAQ:BBBY) recently reported steady results for Q4 fiscal 2012 on attractive product offerings and an improving U.S. housing industry. The retailer was able to perform well despite the weak holiday season and its nascent e-commerce channel.
Overall, we remain positive on Bed Bath & Beyond’s outlook due to its focus on the online channel, international expansion, and efforts to attract customers with store renovation, decentralized management and omni-channel retailing.
A Brief Review Of Q4 Performance
Bed Bath & Beyond saw almost 25% higher revenue in its fourth quarter due to its acquisition of World Market stores last year.  The retailer’s comparable store sales also increased by 2.5% following a similar gain in the previous three quarters of fiscal 2012. However, its gross margins were slightly down this quarter due to increased discount coupon redemption, a shift in sales mix to low cost merchandise and an increase in the number of markdowns.  It appears that cautious consumer spending in the U.S. was the primary reason.
Nevertheless, the following trends support our optimistic outlook for Bed Bath & Beyond.
Efforts To Attract Customers
Apart from a wide variety of good quality products at compelling prices, Bed Bath & Beyond is putting in additional efforts to attract customers. The retailer is renovating some of its stores to align them with changing market conditions.  Also, it is placing a food and beverages section in many of its stores to improve the customer’s shopping experience.
Bed Bath & Beyond’s decentralized management culture has been successful so far.  For a particular market, the retailer hires local people and leverages their knowledge to better serve its customers.  It also allows the company to respond quickly to changing tastes and economic conditions of different markets. Over the long run, Bed Bath & Beyond plans to continue to maintain a decentralized culture to offer appealing products. 
The retailer is also developing its omni-channel capabilities to improve the in-store experience. Omni-channel retailing refers to a seamless approach to elevate the shopping experience through all available channels such as online, mobile, brick-and-mortar, catalog and television. Bed Bath & Beyond is upgrading its mobile websites & apps, implementing a point-of-sale system, improving in-store network communication and installing power saving equipment in its stores.  Also, it is strengthening its marketing to create personalized offers for the customers. We believe that these factors will help the retailer drive store traffic.
Revamping Online Channel
We believe there is a huge scope for greater online sales for the retailer. Bed Bath & Beyond is taking certain steps to enhance its e-commerce website by replacing back-end and customer-facing systems. It plans to launch new websites for buybuy Baby and Bed Bath & Beyond by the end of Q2 fiscal 2013.  The retailer is also speeding up the remaining construction of its e-commerce fulfillment center in Georgia and advancing the development of a new IT data center in North Carolina. Additionally, Bed Bath & Beyond has increased its investment in systems and people to upgrade its analytics and data capabilities. Although the retailer’s e-commerce channel is still small, these efforts should help it tap potential market growth.
Bed Bath & Beyond has a substantial presence in the U.S. and therefore domestic growth opportunities are limited. The retailer has now started to look at international markets for expansion. Last year, it opened its first three stores in Mexico in a joint venture with Home & More. 
Despite the slowdown in the global economy, the Mexican retail market has remained strong.  Mexico has kept inflation under control and its retail market has grown faster than its GDP. Retail sales in the region rose by 11% in 2012 driven by an increase in the country’s middle class population.  Due to the market potential and the success of U.S. retailers such as Wal-Mart (NYSE:WMT) in the region, we expect steady growth for Bed Bath & Beyond in Mexico. The retailer plans to open two more stores in Mexico in fiscal 2013. This marks the beginning of its expansion outside of North America, and there are a number of lucrative markets which the retailer can target.
Our price estimate for Bed Bath & Beyond stands at $69, implying a premium of about 5% to the market price.Notes:
- Bed Bath & Beyond’s SEC filings [↩]
- Bed Bath & Beyond Q4 fiscal 2012 earnings transcript, April 10 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Corporate Responsibility Report, Bed Bath & Beyond [↩]
- Retailing in Mexico, Euromonitor, Feb 2013 [↩]
- Mexican Retail Sales Expanded 10.8% in 2012, Association Says, The Wall Street Journal, Jan 28 2013 [↩]