Bed Bath & Beyond (NASDAQ:BBBY) is one of the largest retailers of home furnishing, bath and linen related items in the U.S. The company operates a variety of concept stores – Bed Bath & Beyond, Christmas Tree Shops, World Market, buybuy Baby and Harmon & Harmon Face Values. The retailer’s stock price has climbed by almost 30% over the last nine months, and currently stands at about 5% below our price estimate of $75. While there are plenty of factors that will drive the retailer’s growth, there are risks that cannot be ignored.
The housing industry in the U.S. appears to be improving, and there is good scope for Bed Bath & Beyond’s expansion both in domestic and international markets. Although the retailer is making efforts to boost its online channel, revenues from this segment are still low. One of the key risk that the company faces is the possibility of losing customers to Amazon (NASDAQ:AMZN) as some studies indicate that Bed Bath & Beyond is very susceptible to showrooming. Moreover, consumer confidence in the U.S. seems to be dwindling again due to the payroll tax increase and a high unemployement rate. These factors could have an offsetting impact on the housing market’s growth.
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Improving Housing Industry
Most of Bed Bath & Beyond’s products are related to home furnishing and therefore the state of the housing industry plays a crucial role in driving the retailer’s sales. Lately, the housing market in the U.S. has started showing signs of recovery. Standard & Poor’s Case-Shiller home price index reported its best gains in the last seven years in May 2013. Twenty cities were tracked for this index and the housing prices increased across the board.  The index again rose sharply in June indicating a sustained momentum in the housing market.
The maps shows the y-o-y change in prices for the 20 cities in the Case Shiller House Price Index. ((Mortgage applications rise first time in four weeks:MBA, Reuters))
The main reason behind the improvement in the housing industry appears to be the fall in mortgage rates, which has led to a rise in the number applications for home loans.  As a result, Bed Bath & Beyond posted steady growth in the first quarter despite overall weakness in the U.S. retail market. The company’s revenue and comparable store sales jumped by 17.8% and 3.4%, respectively, even though the delay in tax refunds and payroll tax increase continued to weigh on consumer spending.  The retailer will benefit as the U.S. housing market continues to improve. S&P Case-Shiller Index still stands substantially below the figure for 2006 and 2007, but it is unrealistic to assume that it will reach those levels anytime soon. Still, there is lot of room for growth and Bed Bath & Beyond can take comfort from this fact.
Continued Expansion Among All The Segments
Bed Bath & Beyond already has a large presence in the U.S., which limits its expansion opportunities. During the first quarter, it opened four Bed Bath & Beyond stores bringing its total to 1,008 stores. The company believes that the U.S. market has potential to hold more than 1,300 such stores and therefore, the expansion will continue. 
Moreover, the retailer opened its first three stores in Mexico last year in a joint venture with Home & More.  The Mexican retail market has been growing at a healthy pace due to its growing middle class and improving lifestyle.  Retail sales in the region jumped almost 11% in 2012, and this trend is likely to continue in the near future.  This provides enough potential for Bed Bath & Beyond to continue its expansion in Mexico.
Additionally, we expect the company to continue adding more World Market stores. Before its acquisition by Bed Bath & Beyond, Cost Plus (now World Market) believed that its two distribution centers across the Each Coast were sufficient to support 100 new stores without any significant additional costs.  It had also identified several locations for the brand’s expansion, which would help Bed Bath & Beyond. As far as Christmas Tree Shops (CTS) are concerned, their presence in the U.S. is limited to 73 stores, which implies that there is still a lot of room for growth.  Most of the stores are located across the East Coast and a majority of the market remains untapped. Moreover, its main competitor Dollar Tree operates more than 4,600 stores.  Even though Dollar Tree’s product range is more diverse, there is still a sizable expansion opportunity for specialty stores such as CTS.
Since its acquisition in 2007, buybuy Baby has expanded at a higher rate compared to the retailer’s other stores, growing its store count from 9 to 84.  We expect this trend to continue as its rival Babies”R”Us operates over 850 stores in the U.S.  buybuy Baby’s geographical reach is limited to only 29 states, and it still has 21 states to explore. 
Sizable Growth Opportunity For Online Business
The U.S. online retail industry is expected to grow rapidly, but Bed Bath & Beyond is still lagging behind as it earns just 1%-2% of its revenues from its online channel. According to eMarketer, online sales of furniture and home furnishing products will almost double and health & personal care products will triple by 2013.  However, the company is making some efforts to improve its online retail capabilities such as the construction of a new fulfillment center, upgrading analytics and data capabilities, and the development of an IT data center. 
Bed Bath & Beyond is also exploring omni-channel possibilities to provide its customers with a seamless shopping experience irrespective of the channel they prefer. The company is replacing its back-end and customer-facing systems for its websites to make them more efficient. Recently, it launched a new website for buybuy Baby and is on track to introduce a rejuvenated Bed Bath & Beyond website by the end of Q2 fiscal 2013.  We believe that these efforts will eventually help the company in positioning itself better in the market.
Amazon’s Showrooming Poses A Threat
Online retail giant Amazon has emerged as a big threat to a number of retailers in the U.S. with its rapid growth and showrooming. Showrooming refers to the phenomenon where shoppers visit physical stores to find products compare their prices on different websites and buy them online. Amazon offers and promotes free mobile apps to encourage its customers to compare prices of various products while walking in different stores.
According to a survey conducted by a Seattle based startup Placed, Bed Bath & Beyond faces the greatest risks due to showrooming, even more than Best Buy (NYSE:BBY) and Target (NYSE:TGT).  According to Simon-Kucher & Partners, a global consultancy firm, product categories that have lower purchase frequency and higher need of touch such as furniture, home furnishing, decorative items, health and beauty are the next in line for the online vs physical store battle.  Therefore, we believe that Amazon poses a serious threat for Bed Bath & Beyond. Although a study found Bed Bath & Beyond’s products to be cheaper than Amazon’s, the lack of an established online channel may keep the retailer’s growth at bay. 
Our price estimate for Bed Bath & Beyond stands at $75, implying a premium of about 5% to the market price.Notes:
- Home Prices Rise, Putting Country In Buying Mood, The New York Times, May 28 2013 [↩]
- ‘Jumbo’ Mortgage Rates Fall Below The Traditional Ones, The Wall Street Journal, Sept 4 2013 [↩]
- Bed Bath & Beyond’s SEC filings [↩] [↩] [↩]
- Bed Bath & Beyond Q1 fiscal 2013 earnings transcript, Jun 26 2013 [↩] [↩] [↩]
- Bed Bath & Beyond Q4 fiscal 2012 earnings transcript, April 10 2013 [↩] [↩]
- Retailing in Mexico, Euromonitor, Feb 2013 [↩]
- Mexican Retail Sales Expanded 10.8% in 2012, Association Says, The Wall Street Journal, Jan 28 2013 [↩]
- Cost Plus’ SEC filings [↩]
- Dollar Tree’s 10k [↩]
- Babies”R”Us’ SEC filings [↩]
- Retail Ecommerce Set to Keep a Strong Pace Through 2017, eMarketer, Apr 24 2013 [↩]
- Placed Study Reveals Most-At-Risk Retailers For Showrooming By Amazon Customers, Placed, Feb 27 2013 [↩]
- Why Bed Bath & Beyond, PetSmart Should Fear Showrooming More Than Best Buy, Forbes, Mar 1 2013 [↩]
- Bed Bath & Beyond Trumps Amazon! The Revenge Of Old School Retail, Yahoo Finance, Aug 6 2013 [↩]