Bed Bath & Beyond (BBBY) is one of the largest specialty retailers of home furnishing and bath & linen related items in the U.S. Over the past four years, the company has grown steadily in terms of comparable store sales backed by its strong market position and attractive offerings [Bed Bath & Beyond’s SEC filings]. As Bed Bath & Beyond comes out with its Q2 fiscal 2013 earnings on September 25, we expect this trend to continue even though the overall retail market is going through a rough phase [Bed Bath & Beyond’s Investor relations]. The company has projected its comparable-store sales to grow in the range of 2%-4% [Bed Bath & Beyond’s Q1 fiscal 2013 earnings transcript, Jun 26 2013].
Amid the weak retail market this year, the home category has remained relatively stable, which should help Bed Bath & Beyond’s sales. Moreover, the retailer enjoys pricing advantage over its competitor Amazon (AMZN), which is known for its affordable products. This should help Bed Bath & Beyond attract customers looking for value-for-money products. The recently concluded quarter has been tough for a number of retailers due to the weak macro-economic environment and can impact Bed Bath & Beyond as well. However, the improving housing industry can enhance the chances of sales of home category products.
The retailer’s gross margins declined in the first quarter due to increased coupon redemptions and we expect this trend to continue in this quarter as U.S. buyers continue to explore money saving options.
Comparable-Store Sales Growth Will Remain Steady
Since the recession of 2008-2009, Bed Bath & Beyond has been growing at a healthy pace. During 2009-2012, the retailer’s comparable store sales increased at an average annual rate of more than 5%. What’s encouraging to see is that Bed Bath & Beyond managed to register positive growth even during the weak holiday season and the first quarter of 2013. The retailer’s comparable store sales grew by 3.4%, 2.5% & 1.7% respectively in the last three quarters when the overall retail industry in the U.S. remained weak.
The retail giant Wal-Mart (WMT), which reported its results last month, stated that its home category delivered excellent comparable-store sales growth [Wal-Mart’s Q2 fiscal 2014 earnings transcript, Aug 15 2013]. This suggest that people are still buying home furnishing products, which is a good sign for Bed Bath & Beyond. However, since Wal-Mart is the price leader, it might be difficult for Bed Bath & Beyond to attract customers who are aggressively cutting back on their non-discretionary spending. This can have a slight negative impact on the retailer’s growth.
Nevertheless, Bed Bath & Beyond enjoys pricing advantage over its other competitor Amazon. An analysis by BB&T Capital Markets (investment firm) found that a basket of 30 comparable items was about 6.5% cheaper at Bed Bath & Beyond as compared to Amazon.  With relatively cheaper products, the company can address the growing threat of showrooming from Amazon and drive more store traffic. Therefore, we believe that Bed Bath & Beyond’s comparable store sales will continue to grow at a moderate pace in this quarter.
Macro-economic Factors Will Have A Mixed Impact
The retail environment in the U.S. has been particularly weak this year due to the payroll tax increase, delayed tax refunds and a high unemployment rate. As a result, the consumer spending has been cautious, which has weighed on the growth of a number of retailers including Wal-Mart and Target (TGT). Since most of Bed Bath & Beyond’s products fall under the n0n-discretionary category, this factor is likely to impact Bed Bath & Beyond’s sales as well.
However, the housing industry in the U.S. is improving, which is positively impacting the sales of home related products. Standard & Poor’s Case-Shiller home price index reported its best gains in the last seven years in May 2013. Twenty cities were tracked for this index and the housing prices increased across the board [Home Prices Rise, Putting Country In Buying Mood, The New York Times, May 28 2013]. The index again rose sharply in June indicating a sustained momentum in the housing market. The main reason behind the improvement in the housing industry appears to be the fall in mortgage rates, which has led to a rise in the number applications for home loans [‘Jumbo’ Mortgage Rates Fall Below The Traditional Ones, The Wall Street Journal, Sept 4 2013]. During August, a number of U.S. consumers spent more on houses and cars while holding back on other products [U.S. retailers rely on deep discounts to win back-to-school shoppers, Reuters, Sept 5 2013]. This trend bodes well for Bed Bath & Beyond’s growth and can offset the impact of weak consumer spending.
Margins Likely To Decline
In Q1 fiscal 2013, Bed Bath & Beyond’s gross margins declined to 39.5% from 40% in Q1 fiscal 2012. The decrease was primarily attributable to increase in coupon redemptions as well as average coupon amount. Moreover, the sales mix also shifted towards lower margin categories suggesting that people were buying cheaper products. These aspects reflect the impact of weak economic environment in the U.S. Since the economic scenario has not changed much in this quarter, we expect the aforementioned trend to continue. The company is still offering heavy discounts such as 20%-50% off coupons, clearance sales with upto 70% off, $50 gift cards, free gifts, free shipping etc.
Our price estimate for Bed Bath & Beyond stands at $75, which is inline with the market price.
Disclosure: No positions