- Bed Bath & Beyond is scheduled to release its Q1 fiscal 2014 earnings on June 26. Although the weak holiday season weighed on the company’s growth last year, we expect a better performance this quarter.
- The housing industry is improving and Costco’s recent quarterly results demonstrate increased demand for household products.
- Bed Bath & Beyond has been making efforts to improve its online capabilities and provide a better shopping experience. We also expect the company to benefit from the acquisition of World Market stores, which essentially strengthens its product portfolio.
Specialty retailer Bed Bath & Beyond (NASDAQ:BBBY) is scheduled to release its Q1 fiscal 2014 earnings on June 26. Although the retailer’s comparable store sales increased by a modest 2.7% last year due to the weak holiday season, we expect Q1 fiscal 2014 to generate better results backed by an improving housing industry, Bed Bath & Beyond’s efforts to drive store traffic and the acquisition of World Market stores. Nevertheless, weakness in consumer spending due to the payroll tax increase and the retailer’s relatively weak online channel might continue to weigh on its results.
Improving Housing Industry
The housing industry in the U.S. appears to be improving. Standard & Poor’s Case-Shiller home price index reported the best gains in the last seven years. Twenty cities in the U.S. were tracked for this index, and housing prices increased across the board. This is positively impacting consumer confidence, and it's giving buyers more confidence in the real estate market. According to a report by Conference Board, the U.S. consumer confidence rose to a five-year high in May 2013. This is not only strengthening new and existing home sales, but is also boosting the sales of home-related merchandise. Costco (NASDAQ:COST) recently reported strong earnings driven by a surge in revenues from home and garden related products. We expect Bed Bath & Beyond to benefit from this trend as well.
Initiatives To Drive Store Traffic
Apart from offering compelling products, Bed Bath & Beyond is employing several strategies to attract customers. The retailer is renovating some of its stores to align them with changing market conditions. It is adding a food and beverages section in a number of stores to elevate the shopping experience. The retailer utilizes a decentralized management structure, wherein it hires local people and leverages their knowledge to better serve its customers. It allows Bed Bath & Beyond to respond quickly to changing tastes and economic conditions of different markets. So far this strategy has yielded good results, and we have no reason to believe that this quarter will be any different.
The retailer provides 20% discount coupons to its customers that do not have any time limit. Last year, the company saw a significant increase in the discount coupon redemption. While this weighed on its gross margins, there was a notable increase in its store traffic. Additionally, Bed Bath & Beyond is developing its omni-channel capabilities to improve the in-store experience. The company is upgrading its mobile websites and apps, implementing a point-of-sale system, improving in-store network communication and installing power saving equipment in its stores. Alongside, it is strengthening its marketing efforts to create personalized offers for its customers.
We believe these initiatives will continue to assist the retailer in driving store traffic.
World Market Acquisition
Last year, Bed Bath & Beyond added Cost Plus World Market stores to its portfolio to expand its overall product offerings. World Market stores offer private label (World Market) brands, which have a distinct design, are of good quality and are not available in regular department stores. A significant number of its products, including collectibles and jewelry are handcrafted and sourced from different parts of the world, which makes them more exclusive for shoppers, according to the company's SEC filings. Bed Bath & Beyond’s acquisition will help the retailer attract more customers and also strengthen its brand image. Moreover, this will somewhat limit competition (Cost Plus was previously a competitor) and grant the retailer a competitive advantage over other specialty retailers and department stores. This is likely to have some positive impact on the company’s Q1 results.
However, Online Business Remains A Weakness
Currently, the U.S. retail industry is experiencing a surge in online sales driven by growing Internet usage and the proliferation of smartphones and tablets. Forrester forecasts that online sales in the U.S. will grow 13% to $262 billion in 2013, and reach $370 billion by 2017. However, Bed Bath & Beyond earns just 1%-2% of its revenues from online sales, which underlines the company’s insufficient effort to leverage this channel. Although the retailer launched its e-commerce business a long time ago, the growth has remained below par. Bed Bath & Beyond is making some efforts to improve its online retail capabilities such as the construction of a new fulfillment center, upgrading analytics and data capabilities and the development of a IT data center. However, these initiatives are focused on long term growth and may not help the retailer this quarter.
Our price estimate for Bed Bath & Beyond stands at $75, implying a premium of about 5% to the market price.
Disclosure: No positions.