- Bed Bath & Beyond Stores constitute 84% of the Trefis price estimate for Bed Bath & Beyond's stock.
- buybuy BABY Stores constitute 14% of the Trefis price estimate for Bed Bath & Beyond's stock.
WHAT HAS CHANGED?
Improvement in Financials in Q4
While BBBY has been struggling with weak sales trends, the management's latest restructuring plan delivered improving results in Q4 on the back of surging demand for home supplies and furnishings. During its fourth quarter 2020 (ended Feb. 27), the company's revenue fell by only 16% y-o-y to $2.6 billion - despite its asset divestitures and the closure of 144 stores. BBBY also witnessed a 4% increase in comparable-store sales in its recent Q4, which marked the company's third straight positive result after two consecutive years of declines. It is worth mentioning that the chain benefited from robust demand in its core home furnishings niche during the pandemic, and from its digital selling platform that saw a large 99% year-over-year (y-o-y) growth in revenues in 2020.
Sets a Light Q1 Guidance
The retailer sees Q1 revenue growth of over 40% to at least $1.83 billion vs. $1.92 billion consensuses. Excluding the impact from divested businesses in both periods, BBBY expects Q1 sales growth of its Core Go-Forward banners to be up approximately 65% to 70%. Bed Bath & Beyond also expects to show sequential improvement in gross margin as the fiscal year progresses. For the full year, BBBY sees revenue of $8.0 Bil to $8.2 Bil vs. $8.2 Bil consensus and adjusted EBITDA of $500 Mil to $525 Mil.
Restructuring and Focus on Core Business
As a part of the restructuring and focusing on its core businesses again - Bed Bath & Beyond has planned to unload its Christmas Tree Shops retail brand, its Linen Holdings unit, and a New Jersey distribution center. The home goods retailer also presented a 3-year outlook, wherein it intends to boost profitability through better inventory management and debt reduction, ultimately resulting in between $500 million and $1 billion in cumulative free cash flow from now through the end of 2023.
Same-Day Delivery Rollout
The retailer announced its nationwide rollout of same-day delivery during the busy holiday season, through a partnership with Shipt and Instacart. The option will be available to customers in eligible ZIP codes at a flat-rate fee of $4.99 for orders of more than $39 at Bed Bath & Beyond and buybuy Baby.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of value that present opportunities for upside or downside to the current Trefis price estimate for Bed Bath & Beyond's stock.
Average Revenue per Square Foot for Bed Bath & Beyond Stores: We estimate the average revenue per square foot for Bed Bath & Beyond stores to grow slightly over the forecast period. While customer shifts to specialty stores and a strengthening housing recovery will favor the growth, intense competition from big-box retailers could make it difficult for the company to sustain momentum. There could be an upside of about 5% to our price estimate if the average revenue per square foot increases to $300 by the end of the forecast period. On the other hand, if the average revenue per square foot decreases slightly from the current levels and reaches $280 by the end of our forecast period, there could be about 5% downside to the Trefis price estimate.
Number of Bed Bath & Beyond stores: There could be an upside of about 5% to the price estimate if the total number of store count reaches 800 by the end of the forecast period. However, if the total store count declines and witnesses a slow growth and stabilizes at 690 toward the end of the forecast period, there could be an approximately 5% downside to the price estimate.
Bed Bath & Beyond Gross Profit Margin: We estimate that Bed Bath & Beyond's gross margin, which is already higher than its competitors, will witness an increase in the long-term at 37%. This ties in with our expectation that the omnichannel model will scale up due to incremental revenues derived from the online and mobile channels along with lower investments in technology will prevent a further fall in gross margins at Bed Bath & Beyond. However, Bed Bath & Beyond is relatively new in the online retail space, and with competitors like Amazon consistently rolling out new features and increasing price competition, Bed Bath & Beyond's omnichannel model might take longer to achieve scale. In the face of intense competition from online counterparts, Bed Bath & Beyond might be increasingly forced to shift toward a low-margin sales mix while bearing incremental costs to maintain its technology at par with competitors. In such a situation, margins could fall as low as 34% at Bed Bath & Beyond, causing our price estimate to fall by more than 5%.
Bed Bath & Beyond is one of the largest specialty retailers of home furnishings and bath and linen-related items in the U.S. The company operates through three main retail avenues namely, Bed Bath & Beyond, Harmon Face Values, and buybuy BABY. The flagship Bed Bath & Beyond retail concept dominates the company’s total stores, accounting for 834 of the company’s 1,020 stores. The company depends primarily on in-store purchases as online sales account for a small percentage of total revenues. However, the company is now shifting focus to become an omnichannel retailer in light of the shift in the competitive landscape with online retailers like Amazon gaining market share. Linen ‘n Things, the only pure-play competitor to Bed Bath & Beyond, filed for bankruptcy and liquidated its stores in 2008.
The company competes with other specialty stores along certain product lines, such as Williams-Sonoma (kitchenware) and Pier 1 Imports (Home Furnishings and Home Textiles), other department stores such as Wal-Mart and Target, as well as online retailers such as Amazon.
SOURCES OF VALUE
Large number of Bed Bath & Beyond stores compared to the company’s other retail concepts
With 834 of the company’s total store count of 1,020, Bed Bath & Beyond stores are by far the largest source of value for the company.
Initiatives for e-commerce underway
Despite a strong business model, Bed Bath & Beyond is struggling with stagnant revenues and declining comparable sales growth, mainly because the company is still very much brick-and-mortar reliant. For that reason, management is increasing its efforts in online initiatives to offset the declining foot traffic. Bed Bath & Beyond is focusing on several initiatives to stay ahead in an intensely competitive environment. It is working on continuously enhancing the website experience for its customers. The company believes that providing a deeper set of merchandise in an omnichannel 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, Bed Bath & Beyond has started its new online loyalty program Beyond+, a service that offers a 20% discount on all purchases as well as free shipping for an annual membership fee of $29, and no minimum purchase amount. The launch of Beyond+ could help increase customer stickiness, eventually leading to some revenue growth if the results are favorable. With these efforts, we believe that e-commerce will become a meaningful business for Bed Bath & Beyond in the future.
Initial Strengthening position in the market
During the 2008 recession, several competitors, including Linen ‘n Things, filed for bankruptcy. Linen ‘n Things, which was the only pure-play competitor to Bed Bath & Beyond, shut over 500 stores in 2008 after holding a liquidation sale, which naturally impacted Bed Bath & Beyond’s sales. However, in 2009 and 2010, Bed Bath & beyond witnessed a strong rebound in comparable sales and average revenue per square foot. A large part of the increase can be attributed to fewer retailers specializing in the linens and home furnishings segment. In 2012, its comparable sales continued to increase steadily, and this trend continued in 2013. Though 2014 and 2015 were a slower in terms of overall growth, due to the housing recovery looking frail, the company still took substantial measures to maintain its strength in the market. In 2016, the company made sizable investments in technology to shift to an omnichannel retail model, which seamlessly integrates the traditional retail outlets with Bed Bath & Beyond's online and mobile channels, giving the specialty store a competitive edge over other traditional retailers.
Recent Weak Performance
The home goods retailer's weak performance since 2017 was mostly below expectations due to its costly battle to ward off competition from internet retailers. The company has been witnessing lower store comparable sales and shrinking margins.
Going forward, we expect the declining trend in Bed Bath & Beyond's profitability to continue in the near term. This is because the company is trying to remodel both its online and offline store formats at the same time - including redesigning stores, spending on its loyalty program, revamping its supply chain, and increasing its shipping costs in order to catch up with other online retailers - which could result in a further decline in margins.
Shifting consumer preferences may affect home furnishing industry
In the digital age, many consumers may prefer furnishing their home with a new HDTV or other electronics instead of linens and other Home Décor items. According to a survey by IBM, electronics is the product category most often chosen by multi-channel retail shoppers. Home Décor items ranked last, the lowest out of all discretionary spending items surveyed.
The products sold by Bed Bath & Beyond are often discretionary spending items (a consumer may choose to delay remodeling his home). In addition to general macroeconomic variables, sales of these items are sensitive to specific macroeconomic variables such as new home sales and house prices. The trend in these variables may affect the profitability of the company in the future.
Shifting competition from specialty retailers to big retail chains like Wal-Mart
Linen ‘n Things was the only pure-play competitor to Bed Bath & Beyond. However, after its bankruptcy, its sales have been divided among Bed Bath & Beyond and the big retail chains such as Wal-Mart and Target, as well as online players such as Amazon.