Specialty retailer Bed Bath & Beyond (NASDAQ:BBBY) operates a variety of businesses in the U.S., which have been doing reasonably well. This is evident from the fact that the company’s comparable store sales growth has averaged around 5.5% for the past three years. To sustain this growth momentum, Bed Bath & Beyond is focusing on improving its online business as well as customer service. While same store sales is an important factor for the retailer, its ability to open new stores also plays an important role in its growth. In this analysis, we look at Bed Bath & Beyond’s expansion across different segments and their probable future.
Bed Bath & Beyond has expanded its namesake stores at a steady pace over the past and is likely to continue following the same strategy. For World Market stores, the retailer will plan its expansion carefully in order to dilute the threat of self-cannibalization. Its Christmas Tree Shops’ expansion has been slow so far, but the market holds good potential for them. The U.S. market also presents healthy room for growth for buybuy Baby stores, but we expect Harmon & Harmon Face Values‘ expansion to remain slow. However, there exists an opportunity for the company to step up the expansion of Bed Bath & Beyond, Christmas Tree Shops, and buybuy Baby. If Bed Bath & Beyond takes advantage of this opportunity, there can be about 10% upside to its stock price.
Our price estimate for Bed Bath & Beyond stands at $80, implying a premium of about 5% to the market price.
Bed Bath & Beyond Stores – Steady Expansion Likely To Continue
Through its namesake stores, Bed Bath & Beyond offers a large array of bed linens, bath items, kitchen ware, furniture and other home furnishing products. These stores have a wide presence in the U.S. with over 1,011 stores spread throughout the country. Despite the substantial presence, the company believes that the market can hold more than 1,300 such stores.  Therefore, we believe that Bed Bath & Beyond’s expansion will continue. The retailer opened about 13 stores on average during the last three years and added another seven stores during the first two quarters of fiscal 2013. This is a measured pace.
World Market Stores – Slow Expansion To Prevent Cannibalization
Bed Bath & Beyond acquired 258 World Market stores (Cost Plus) back in June 2012, and increased their store count to 267 by the end of Q2 fiscal 2013.  Before the acquisition, Cost Plus had planned to open 15-20 stores annually. According to the company, the two state-of-the-art one million square feet distribution centers across each coast were sufficient to support 100 new stores without any significant additional costs.  It had already identified several locations within its existing markets which will help World Market’s expansion.
Given the similarity between Bed Bath & Beyond’s and World Market’s product offerings, the retailer might not want to expand World Market stores in those areas where its namesake brand already has a strong presence. This way it will be able to negate the threat of self-cannibalization. Hence, we expect the expansion pace to be slower and forecast an addition of 10 such stores annually.
Christmas Tree Shops – Capable Of Expanding Faster
With their appealing product offerings and architectural theme, Christmas Tree Shops (CTS) provide a fun shopping experience for customers. Although CTS’ presence is currently limited to 73 stores, it has a good growth potential in the U.S. Most of its stores are located across the East Coast, which leaves a large area 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 the specialty store. Interestingly, these stores generate significantly higher revenue per store as compared to Bed Bath & Beyond and buybuy Baby stores, which justifies their expansion.
However, this segment has expanded at a slow pace over the past four years, opening just six stores annually. Therefore, we forecast an addition of just four stores every year. Nevertheless, we believe that CTS are capable of expanding at a much faster pace if the company realizes its true potential.
buybuy Baby – Healthy Room For Growth
Since its acquisition in 2007, buybuy Baby has expanded at a higher rate compared to Bed Bath & Beyond’s other stores, increasing its store count from 9 to 84. We expect this trend to continue as the business has significant room for growth considering the widespread presence of its rival Babies”R”Us, which operates over 850 stores in the U.S.  Moreover, buybuy Baby’s geographical reach is limited to only 29 states and still has 21 states into which to expand.  According to our forecast, Bed Bath & Beyond can open somewhere around 10 stores annually over the course of next five-six years.
Harmon & Harmon Face Values – Expansion Will Be Slow
Harmon & Harmon Face Values is the smallest of Bed Bath & Beyond’s businesses with only 49 stores as of Q2 fiscal 2013. Historically, its expansion has been slow as the company has opened just two stores on average during the last four years. Since Bed Bath & Beyond is more focused on adding HFV store-in-store locations across its different store concepts, we expect its expansion to remain slow. We forecast that the retailer will open two to three HFV stores every year through the end of our forecast period.
What Will Be The Impact If Bed Bath & Beyond Expands Aggressively?
We project the number of Bed Bath & Beyond stores to reach 1,060 by 2020. However, if the company decides to step up its namesake store expansion in the U.S. and enters some international markets, its store count can be higher. If it adds 15 stores annually instead of 8 that we currently forecast, its store count towards the end of our forecast period will cross 1,120. We believe that Bed Bath & Beyond can expand its Christmas Tree Shops faster than what it has done over the past few years. If the retailer opens 10 stores annually for the next five-six years, the CTS count will reach 150, which seems achievable given the market potential. Similarly, if the company opens 15 buybuy Baby stores every year encouraged by the growth opportunities, its store total will reach 200 by 2020.
Making these adjustments in our pricing model, we get 10% upside to our price estimate. Although this scenario is a possibility, it remains to be seen if the company decides to step up its expansion amid the prevailing economic weakness in the U.S.Notes:
- Bed Bath & Beyond Q1 fiscal 2013 earnings transcript, Jun 26 2013 [↩]
- Bed Bath & Beyond Reaches Agreement To Acquire Cost Plus, Inc., Bed Bath & Beyond, May 9 2012 [↩]
- Cost Plus’ SEC filings [↩]
- Dollar Tree’s 10k [↩]
- Babies”R”Us’ SEC filings [↩]
- Bed Bath & Beyond’s SEC filings [↩]