In terms of revenues, Bed Bath & Beyond‘s (NASDAQ:BBBY) Christmas Tree Shops stand second to the retailer’s namesake stores. The company generated 14% of its revenues from this business in 2012.  However, the contribution to gross profits was less than 10%, as we estimate gross margins for Christmas Tree Shops (CTS) to be around 27% compared to 44% for Bed Bath & Beyond’s other segments. 
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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.  With their attractive pricing, CTS 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.
What’s The Business Of These Shops?
Christmas Tree Shops are bargain stores offering household furnishing, home decor and gift items. As the name suggests, these stores also sell Christmas decorations as well as other festive and seasonal items. As is the case with Bed Bath & Beyond’s other business segments, the shopping experience is a key aspect of these stores. This is why most CTS stores resemble older buildings in colonial and Victorian architectural styles. 
With an appealing name and architectural theme, CTS provide its customers with a fun experience. This also gives it a slight competitive advantage over its peers such as Dollar Tree, Kirkland’s and TJX Companies, who operate regular stores. The original CTS at Cape Cod, Massachusetts used to be a landmark and must-see destination for visitors in the area.
How Significant Are They For The Company?
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. Currently the company operates 74 CTS in the U.S., mainly across the East Coast, which suggests that there exists a large growth potential.  Given CTS’ success in the U.S., international expansion is not out of the question either.
Christmas Tree Shops offer a signup and save program for its customers, wherein they become CTS members with a free online sign up and get attractive offers and deals. To attract new customers, it offers a $10 discount on a minimum purchase of $50 that is a maximum of up to 25% off.  Given the anticipated growth in online retail, the growing adoption of omni-channel retailing and Bed Bath & Beyond’s efforts to improve its e-commerce business, this should help CTS drive store and online traffic.
What Do The Numbers Suggest?
Christmas Tree Shops constitute about 10% of Bed Bath & Beyond’s value according to our estimates. As a discount store, we estimate its margins to be lower than the retailer’s other segments and similar to those of Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). However, the growth has been impressive. Bed Bath & Beyond acquired CTS in 2003, and this business has grown rapidly since.
CTS contributed just under 10% to the retailer’s revenues in 2005, and this figure increased to around 15% in 2011. Although the revenue contribution 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. In 2012, these stores generated average revenue of about $21 million per store, which is significantly higher than Bed Bath & Beyond stores’ $7.6 million and buy buy Baby stores’ $10 million. 
Our price estimate for Bed Bath & Beyond stands at $76, implying a premium of about 10% to the market price.Notes: