- Bed Bath & Beyond Stores constitute 67% of the Trefis price estimate for Bed Bath & Beyond's stock.
- buybuy BABY Stores constitute 12% of the Trefis price estimate for Bed Bath & Beyond's stock.
- Christmas Tree Shops constitute 12% of the Trefis price estimate for Bed Bath & Beyond's stock.
WHAT HAS CHANGED?
BBBY's First Same-Store Sales Rise in Nearly Four Years
Same-store sales rose 6% — its first quarter of growth in the category since the fourth quarter of fiscal 2016. Bed Bath & Beyond's online business surged more than 80% during the fiscal Q2, as shoppers stocked up on disposable face masks, college dorm decor, and patio furniture. Net sales fell about 1% to $2.69 billion. The company said it saw 2 million new customers during the period, many of them younger and spending more money per trip. The sales gains, lower spending on promotions, and the use of its stores to fulfill more online orders, helped swing the company to a profit of $1.75 per share from a loss of $1.12 per share.
Same-Day Delivery Rollout
The retailer announced its nationwide rollout of same-day delivery, just in time for 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.
Bed Bath To Close 200 Stores Over Next 2 Years
The company said it plans to permanently close roughly 200 of its namesake stores over the next two years, starting later in 2020, as it works toward getting back to profitability against the backdrop of the coronavirus pandemic. As of Aug 29, it operated a total of 1,476 stores, including 955 Bed Bath & Beyond shops. These actions should generate annual cost savings of between $250 million and $350 million, excluding related one-time costs.
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 decline slightly over the forecast period. While inflation and customer shift to specialty stores will favor the growth, intense competition from big-box retailers such as Wal-Mart, and online retailers such as Amazon, along with frail housing recovery may 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 $225 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 $210 by the end of our forecast period, there could be about 5% downside to the Trefis price estimate.
Number of Bed Bath & Beyond stores: We estimate that on average the company will close 2-4 Bed Bath & Beyond stores every year and then stabilize over the forecast period. There could be an upside of about 5% to the price estimate if the total number of store count reaches 1,010 by the end of the forecast period. This is a plausible scenario since there are currently close to 994 Bed Bath & Beyond Stores. Furthermore, the company operates only a few stores in Canada, so there is a potential to expand the presence considerably in that country. However, if the total store count declines and witnesses a slow growth and stabilizes at 930 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 a decline in the long-term at 31.8%. This ties in with our expectation that the omnichannel model will achieve scale by 2022 and 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 30.6% 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 four main retail avenues namely, Bed Bath & Beyond, Christmas Tree Shops, Harmon Face Values, and buybuy BABY. The flagship Bed Bath & Beyond retail concept dominates the company’s total stores, accounting for 994 of the company’s 1,531 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. This strengthened Bed Bath & Beyond’s position in this niche retailing segment. Furthermore, the company acquired Cost Plus in 2012 and added another segment in its business, known as World Market.
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 994 of the company’s total store count of 1,531, Bed Bath & Beyond stores are by far the largest source of value for the company. Furthermore, as a specialty retailer, we estimate Bed Bath & Beyond has higher gross margins than its other retail store concept, Christmas Tree Shops, which is a discount retailer.
Average revenue per square foot for Christmas Tree Shops
We have estimated that Christmas Tree Shops has an average revenue per square foot at about $472. This is almost double the company's average revenue per square foot.
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 2017 and 2018 performance 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.