Bed Bath & Beyond Earnings Preview: Housing Recovery And Strong Market Position Can Translate Into Steady Growth

by Trefis Team
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As home goods retailer Bed Bath & Beyond (NASDAQ:BBBY) comes out with its Q3 fiscal 2013 results on January 8, we expect it to sustain its steady growth momentum. (Fiscal years end with February.)  Backed by its strong market position and an improving housing industry, the retailer’s comparable store sales have increased by 3.7% and 3.4%, respectively, during the last two quarters.

The recovery in the housing market remained strong and steady during the recently concluded quarter, no doubt benefiting Bed Bath & Beyond. Moreover, since the insolvency of Linen ‘n Things, Bed Bath & Beyond has been the market leader with limited competition from other players. It has served as a primary destination for customers looking for home decor products, which will continue to benefit the company. However, Bed Bath & Beyond’s weakness in the online channel could be easily exploited by players such as Amazon (NASDAQ:AMZN) and Williams-Sonoma.

All in all, we are expecting to see steady growth in Bed Bath & Beyond’s Q3 results. During its last quarter’s earnings call, the company had projected 1%-3% comparable store sales growth for the recently concluded quarter. [1] We will thus soon see if they made their bogey. We are also eager to hear any commentary they provide on the holiday selling season that falls in their fiscal fourth quarter.

Our price estimate for Bed Bath & Beyond stands at $80, which is inline with the market price.

See our complete analysis for Bed Bath & Beyond

Housing Market Recovery Should Boost Sales

The ongoing recovery in the U.S. housing market continued in the December quarter of 2013, as sales of new homes improved significantly. In October and November, the number of new homes sold increased by more than 20% year over year to 968,000 driven by strong consumer confidence and low mortgage rates. [2] [3]

Consumers have been spending more on houses this year in order to take advantage of low interest rates. They have also been comfortable in spending more on home related goods. This is evident from the fact that home improvement retailer Home Depot (NYSE:HD) reported a 7.4% rise in third quarter sales on strong housing recovery. Bed Bath & Beyond has enjoyed this trend over the past few quarters as well.

Strong Market Position Will Help

Bed Bath & Beyond enjoys a strong position in the U.S. retail market with its broad selection of products, and decentralized management culture. Through its different businesses such as World Market stores and Christmas Tree shops, the retailer offers a wide range of home furnishing and decorative products that might not be easy to find in any other store. Since customers shop for such products occasionally, the quality, variety and shopping experience become important. Bed Bath & Beyond enjoys strength on all these fronts.

Moreover, the retailer’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. Therefore, U.S. buyers are likely to prefer Bed Bath & Beyond over other retailers for their home furnishing needs.

However, Weak E-Commerce Channel Brings Competition Into Picture

Historically, Bed Bath & Beyond hasn’t focused too much on its online channel with a belief that its business is more about store shopping experience. Although the company is now looking to revamp its e-commerce business, it still accounts for just 3% of the total revenues. Due to this, not only is Bed Bath & Beyond missing out on a substantial growth opportunity, but is also facing stiff competition from strong online players such as Amazon.

According to a research by Placed, Bed Bath & Beyond faces the biggest threat of showrooming from Amazon. [4] Showrooming refers to the phenomenon where shoppers browse products at stores, compare their prices online and shop at a website that offers similar products at cheaper prices. This puts Bed Bath & Beyond’s store traffic at great risk. Also, due to a weak e-commerce channel, it becomes difficult for the specialty retailer to compete in the online channel. Additionally, Bed Bath & Beyond’s competitor Williams-Sonoma earns close to 40% of its revenues from the online channel, which suggests that it offers a better product variety over the Internet. Hence, Bed Bath & Beyond’s competitive advantage somewhat diminishes over the Internet.

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Notes:
  1. Bed Bath & Beyond’s Q2 fiscal 2013 earnings transcript, Sept 25 2013 []
  2. Home Sales Data, National Association of Home Builders []
  3. Sales Of New Homes Fell 0.3% in October, Bloomberg, Nov 29 2012 []
  4. Placed Study Reveals Most-At-Risk Retailers For Showrooming By Amazon Customers, Placed, Feb 27 2013 []
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