In line with our expectations, Bed Bath & Beyond (NASDAQ:BBBY) reported steady growth in its Q2 fiscal 2013 results despite the difficult retail environment. The company also raised its outlook for the entire year, which is encouraging to see given the weakness in back-to-school season and a conservative forecast for the holiday season.  Bed Bath & Beyond’s stock priced rose by 4% following the earnings release and has risen by almost 33% since the start of the year.
The company’s revenues and comparable store sales grew by 8.9% and 3.7% respectively, which were at the higher end of its guidance for the quarter.  Bed Bath & Beyond’s growth is mainly attributable to growing consumer spending on home related products driven by the improving housing industry. The specialty retailer offers a wide range products that attract affluent as well as cost-conscious customers. As a result, the store traffic at Bed Bath & Beyond’s stores increased throughout the first half of the fiscal and is likely to continue going forward.  Additionally, the retailer is well-positioned to remain competitive against peers such as Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN). It is also making some efforts to strengthen its online and stores channel, which should help its sales in the long term.
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Change In Consumer Spending Pattern Is Helping Bed Bath & Beyond
This year, there has been a notable change in the U.S. consumer spending patterns as several shoppers have started diverting their spending to cars and houses in order to take advantage of low interest rates.  Subsequently, they are spending less on other products such as apparel and electronics. This has boosted the housing market in the U.S. as the net worth of households climbed by $1.34 trillion in the second quarter of 2013. The Standard & Poor’s 500 index, which measures the property values across 20 cities, increased by 10% in the first quarter and further rose by 2.4% in the second.  In May, this index posted its best gains in the last seven years.
Due to the improving housing market, U.S. consumers have started spending more on home related products. According to a report by Unity Marketing, a firm that tracks consumer behavior, spending on high-end home products by affluent buyers has increased substantially during the third quarter of 2013. Spending on high end linens, fabrics, curtains, sheets, towels and other bed linens and table linens increased by almost 51.1% in the ongoing quarter as compared to the first few weeks of the second quarter. Also, purchases of furniture, lamps and floor coverings is up by 26.3%.  As the affluent consumer confidence is rebounding, this spending trend is likely to persist in the near future, which bodes well for Bed Bath & Beyond’s growth outlook.
In addition to affluent buyers, Bed Bath & Beyond has emerged as a viable destination for cost conscious customers as well. The company is offering heavy discount coupons and deals in order to drive store traffic amid a weak retail environment. During the quarter, Bed Bath & Beyond’s gross margins declined by 40 basis points mainly due to the shift in sales mix to cheaper products and increased coupon redemption. 
The Retailer Is Well Positioned To Fend Off Competition
Retail giant Wal-Mart, which reported its Q2 earnings last month, stated that its home related product category witnessed robust comparable store sales growth. This is attributable to the fact that the retailer offers its products at lower prices and hence becomes a viable shopping option in the current environment. However, we believe that Bed Bath & Beyond is well equipped to remain competitive against Wal-Mart. Being a specialty retailer, Bed Bath & Beyond offers a greater variety of products that might not be easy to find in any other store. Since customers shop for home furnishing products occasionally, the quality, variety and shopping experience become important. Moreover, Bed Bath & Beyond’s decentralized management culture enables it to better serve its customers by offering products in accordance to the regional tastes. This culture leverages the knowledge, independence and customer focus of the store associates to respond efficiently to the market demand.
Although a research by Placed suggests that Bed Bath & Beyond faces the biggest threat of showrooming from Amazon, the specialty retailer’s pricing advantage over the online giant makes this threat less imminent.  An analysis by BB&T Capital Markets (investment firm) found that a basket of 30 comparable items was about 6.5% cheaper at Bed Bath & Beyond as compared to Amazon.  Moreover, many customers prefer to physically see the home furnishing products before buying them.
Bed Bath & Beyond Is Making Several Efforts To Boost Online & Store Sales
Bed Bath & Beyond’s online business is very small contributing just 1%-2% to its overall revenues. However, this channel is quite important for the retailer given the optimistic outlook of the online retail industry. According to eMarketer, online sales for furniture and home furnishing products will almost double by 2016.  The company appears to be making some valuable efforts including the launch of new websites and omni-channel retailing to take advantage of this growth.
Bed Bath & Beyond launched new websites for its namesake business and buybuy Baby during the quarter. It also replaced their back end and customer facing systems to make them more efficient. Moreover, it is planning to enhance network communication in its stores and upgrade mobile websites and apps.  The retailer is also working towards improving its point-of-sale system as well as the growth and development of IT analytics, marketing and e-commerce. Bed Bath & Beyond is in the process of building, equipping and staffing its IT data center in North Carolina, which will support its overall IT systems.  We believe that the effective execution of these strategies will allow the company to tap the tremendous growth potential in online retailing.
Our price estimate for Bed Bath & Beyond stands at $75, which is inline with the market price. However, we are in the process of updating our model in light of the recent earnings.Notes:
- Earnings: Bed Bath & Beyond’s Profit Rises On Increased Sales, The Wall Street Journal, Sept 25 2013 [↩] [↩]
- Bed Bath & Beyond’s Q2 fiscal 2013 earnings transcript, Sept 25 2013 [↩] [↩] [↩] [↩]
- U.S. retailers rely on deep discounts to win back-to-school shoppers, Reuters, Sept 5 2013 [↩]
- Housing Worth in U.S. Rises as Housing Market Improves, Bloomberg Businessweek, Sept 25 2013 [↩]
- Affluent Consumers to Spend More Freely Through Yearend, Marketing Forecast, Sept 4 2013 [↩]
- Placed Study Reveals Most-At-Risk Retailers For Showrooming By Amazon Customers, Placed, Feb 27 2013 [↩]
- Bed Bath & Beyond Trumps Amazon! The Revenge Of Old School Retail, Yahoo Finance, Aug 6 2013 [↩]
- Retail Ecommerce Set to Keep a Strong Pace Through 2017, eMarketer, Apr 24 2013 [↩]