Bed Bath & Beyond‘s (NASDAQ:BBBY) shares fell by more than 5% in after-market trading after it reported disappointing Q4 fiscal 2013 results and issued weak guidance for the first quarter of fiscal 2014. The company’s net income declined by 11% during the quarter and its revenues fell by 5.8% to $3.2 billion, missing estimates by almost $20 million. Owing to sluggish consumer spending and heightened competition from Amazon (NASDAQ:AMZN), the home goods retailer issued first quarter EPS guidance in the range of $0.92-$0.96, while analysts were expecting the figure to be around $1.02.  It appears that Bed Bath & Beyond is feeling the impact of weak consumer confidence, slowing housing recovery and extreme weather conditions as this was its second consecutive lackluster quarter.
However, the recent lack of momentum is unlikely to have a long term impact on the company. Bed Bath & Beyond still remains the strongest home goods retailer with its expansive product variety and matchless understanding of customer needs. Despite being a specialty retailer, Bed Bath & Beyond’s products aren’t too expensive as compared to Amazon, which positions it very well to fend off competition from the online giant. Additionally, the company has taken several steps towards the development of its online business and omni-channel platform that can help its revenue growth going forward.
Our price estimate for Bed Bath & Beyond stands at $78.80, implying a premium of about 15% to the market price. However, we are in the process of updating our model in light of the recent earnings release.
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Huge Product Variety And Compelling Shopping Experience Will Continue To Attract Customers
For many years, Bed Bath & Beyond has been one of the most sought-after stops for home goods shopping due to its vast product range. During the last 10-12 years, the retailer has acquired different business concepts to add a greater depth to its portfolio of retail chains. The company acquired Harmon stores in 2002, which added health and beauty care products to its portfolio. Soon after Harmon, Bed Bath & Beyond acquired the Christmas Tree Shops, which offers home decor, home furnishing and gift items. The retailer has grown this concept from 23 stores at the time of acquisition to 77 stores currently. In 2007, the company bought buybuy Baby to add baby products and children’s accessories to its arsenal. Bed Bath & Beyond’s most recent acquisition is World Market, whose products are similar in nature to Bed Bath & Beyond’s but still have a unique appeal.
The company’s decentralized management culture leverages the knowledge, independence and customer focus of its store associates to offer products in accordance to the regional and chain-specific tastes. It enables the retailer to better understand its customers’ needs and respond accordingly. Moreover, while shopping at Bed Bath & Beyond, customers are often tempted to buy more when they have so many options to choose from. Tall shelves filled with a variety of merchandise not only help customers find products best suited to their liking, but they also induce impulse buying.
Bed Bath & Beyond also focuses on providing its customers with an enticing shopping experience. Since buyers shop for home furnishing products only occasionally, in-store experience is very important. A number of the retailer’s Christmas Tree Shops resemble older buildings in Colonial and Victorian architectural style. Its World Market stores are filled with creative and colorful presentations, with goods displayed in open crates and barrels. The products are categorized in various separate “shops” within the store. In some states, these stores also have wine and coffee tasting along with other food assortments. Additionally, Bed Bath & Beyond is adding food and beverages section to some of its namesake stores to further elevate shopping experience. Therefore, we believe that this slight Q4 fumble of Bed Bath & Beyond will have no permanent impact on its loyal customer base.
Competitive Pricing Will Help Dilute Growing Amazon Threat
In addition to offering attractive products, Bed Bath & Beyond keeps its prices comparable with other popular retailers to ensure the best deals for its customers. Although it is difficult to compete with online giant Amazon over prices, Bed Bath & Beyond has managed to do so. According to Oppenheimer analyst Brian Nagel, Bed Bath & Beyond’s prices are 15% lower (on average) than that of Amazon’s after incorporating the home goods retailer’s 20% discount coupon. Moreover, while Amazon’s prices are 7% lower on average excluding sales taxes, it is at par with Bed Bath & Beyond once taxes are included. 
Considering that the home goods retailer has a better product range than Amazon, lower or comparative prices gives it a competitive edge over the online retailer. Moreover, it positions Bed Bath & Beyond better to curb the growing threat of showrooming from Amazon. Wal-Mart may offer the lowest prices in the market, but its product variety, quality and shopping experience cannot match that of Bed Bath & Beyond. Hence, we believe that the home goods retailer is well-poised in terms of pricing to continue driving store traffic.
Developing E-Commerce Business Can Increase Customer Base
Despite being such a big retail chain in the U.S., Bed Bath & Beyond’s online channel is immaterial. The channel’s small size somewhat dilutes the company’s strong market position and prevents it from enjoying the surge in the U.S. online retail industry. However, Bed Bath & Beyond has started taking its online business seriously and is working hard to enhance the customers’ overall shopping experience in stores and online by leveraging mobile devices and social media. The company believes that providing a deeper set of merchandise in an omni-channel environment, combined with compelling customer service, will help it gain market share in the future.
For this purpose, Bed Bath & Beyond is re-platforming and upgrading websites for Bed Bath & Beyond and buybuy Baby. It is also looking to initiate a selling component of its Christmas Tree Shops websites along with the development of IT analytics, marketing and e-commerce groups.  The company recently completed the construction of its new IT data center in North Carolina that will support its overall IT systems. With these efforts, we believe that e-commerce will become a bigger business for Bed Bath & Beyond in the future, and make its sales resilient to the impact of low store traffic in winter months.Notes:
- Bed Bath & Beyond Drops After Profit Forecast Trails Estimates, Bloomberg, Apr 10 2014 [↩]
- Can Bed Bath & Beyond, Inc. Effectively Compete With Amazon.com, iStockAnalyst, Mar 19 2013 [↩]
- Bed Bath & Beyond’s Q4 fiscal 2013 earnings transcript, Apr 9 2014 [↩]