Where Is Bed Bath & Beyond’s E-Commerce Business Headed?

+5096.46%
Upside
0.08
Market
3.90
Trefis
BBBY: Bed Bath & Beyond logo
BBBY
Bed Bath & Beyond

Following the footsteps of major retailers such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Costco (NASDAQ:COST), Bed Bath & Beyond (NASDAQ:BBBY) is also taking some firm steps to strengthen its online channel. In the digital age, where several retailers are looking to leverage the growing popularity of Internet and smartphones to enhance their sales, Bed Bath & Beyond doesn’t want to lag behind. The company has been trying hard to integrate its vast store network with its nascent online channel.

Over the past few years, almost all U.S. retailers have seen substantial growth in their online revenues, but it hasn’t turned into a big business for any of them. Currently, direct-to-consumer channel accounts for less than 3% of Wal-Mart’s, Target’s and Bed Bath & Beyond’s revenues. While this figure is likely to increase going forward, growing competition from pure play online retailer Amazon (NASDAQ:AMZN) will act as a repulsive force. To subdue this threat and translate e-commerce into a meaningful business, the U.S. retail industry is gradually shifting towards omni-channel retailing, which refers to providing a seamless shopping experience across stores and online channel. This has become somewhat of an inevitable move for U.S. retailers, including home goods company Bed Bath & Beyond.

Our price estimate for Bed Bath & Beyond stands at $ 77, implying a premium of less than 20% to the market price.

Relevant Articles
  1. What To Expect From Bed Bath & Beyond’s Stock Post Q1 Results?
  2. Down 54% in Six Months, What’s Next For Bed Bath & Beyond Stock?
  3. Bed Bath & Beyond Up 53% In A Month, What’s Next?
  4. Overstock.com’s Stock Rose 36% In The Last Month, Will The Rise Continue?
  5. Can Bath & Body Works Stock Rebound After A 23% Fall In a Month?
  6. Can BBBY’s Stock Trade Higher Post Q3 Results?

See our complete analysis for Bed Bath & Beyond

Omni-Channel Development Along with Industry Growth will Help

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 the company’s strong market position and prevents it from enjoying the surge in the U.S. online retail industry. According to eMarketer, online sales of furniture & home furnishing products is expected to rise from $18 billion in 2013 to about $32 billion in 2018. Also, sales of health & personal care products is projected to go up from $15 billion to around $27 billion. [1] Growth in both these market segments should help Bed Bath & Beyond’s web sales.

The company 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 adding additional functions to its relaunched websites for Bed Bath & Beyond and buybuy Baby. It is also upgrading its mobile websites and apps along with network enhancement in stores.

Alongside, the retailer is developing IT analytics, and marketing and e-commerce groups. The company has completed the construction of its IT data center in North Carolina and is in the phase of staffing and equipping the facility. In addition, Bed Bath & Beyond is planning to open another distribution facility for its direct-to-consumer and store fulfillment. We believe that the retailer will soon consider shipping products directly from its stores, which has become a very popular trend in the U.S. retail industry lately. With these efforts, we believe that e-commerce will become a meaningful business for Bed Bath & Beyond in the future.

However, Short Term Financial Benefits will be Minimal

Online sales contribute around 2% to Bed Bath & Beyond’s net sales and it will take a while before this channel becomes a substantial value contributor. Even if assume that the retailer’s online sales will double after its new distribution and IT data center is fully functional, there will be less than 5% upside to our price estimate.

Although online retail sales have grown at a robust pace over the past six-seven years, the rate of increase relative to increase in overall retail sales has been moderate. In 2006, online sales contributed around 2.5% to net retail sales in the U.S., and this figure increased to around 6% in 2013. During the next five years, this figure is expected to rise to only 9%, which indicates that retailers such as Bed Bath & Beyond will have to significantly outpace the online industry growth to translate their e-commerce channel into a meaningful business. [2] [3]

However, a strong presence in the online channel and its integration with the stores channel is more about protecting future growth and giving customers the flexibility in purchasing. Investing in this channel is likely to bring some positive outcomes for Bed Bath & Beyond, as its e-commerce channel is very small at the moment and the online retail market is growing strongly.

Well Positioned Against Amazon and Wal-Mart

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. [4]

Considering that the home goods retailer has a better product range than Amazon, lower or comparable prices give 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 and web traffic.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

Notes:
  1. US Retail Ecommerce Sales Highest for Computers, Consumer Electronics, eMarketer, Apr 11 2014 []
  2. U.S. Census Bureau News, U.S. Census, Aug 16 2012 []
  3. Total US Retail Sales Top $4.5 Trillion in 2013, Outpace GDP Growth, eMarketer, Apr 10 2014 []
  4. Can Bed Bath & Beyond, Inc. Effectively Compete With Amazon.com, iStockAnalyst, Mar 19 2013 []