Bed Bath & Beyond (NASDAQ:BBBY) is testing a new membership program where members will get a 20 percent discount on all purchases on paying an annual subscription fee of $29. The members will also enjoy free standard shipping on online purchases. Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) have seen the benefits of such membership plans, and Amazon Prime members purchase nearly twice as much as non-members. A standard discount on all products might attract regular customers towards the membership plan, since purchases of around $150 in a year will cover the subscription charge by way of discounts. However, attracting new customers through this plan might not be easy for the company. Bed Bath & Beyond has been using discount coupons as a promotional tool for several years. While offering discounts via memberships can increase both sales and customer loyalty, it might have to do away with its coupon strategy, which can have an impact on sales. However, once a membership plan is rolled out on a large scale, it can drive revenue growth for the company.
Higher Revenues, Membership Fees Can Offset A Decline In Margins Due To Discounts
A standard discount on all purchases from members, and free shipping, can impact the margins of Bed Bath & Beyond. That said, if the company is able to generate higher revenues through this strategy, the decline in margins can be offset. Additional revenues through membership fees can ensure that the valuation of the company does not get negatively impacted through this program. Higher revenues and a loyal member base can drive revenues and profitability in the long term.
As per our estimates, the company's gross profit margin will decline from around 38.4% in 2016 to nearly 37.0% by the end of our forecast period. Increases in coupon redemptions have impacted these margins negatively in the past.
If the margins decline by nearly 200 bps due to the membership discounts over our forecast period and reach around 35% by its end, there can be a nearly 5% downside to our price estimate.
However, the membership plan should ideally drive sales for the company and generate additional revenues in terms of subscription fees. We expect Bed Bath & Beyond's average revenue per square feet to increase from around $234 in 2016 to $246 by the end of our forecast period.
If the membership program is successful and is able to generate additional revenues, leading to a rapid increase in the average revenue per square feet such that it reaches around $266 by the end of our forecast period, it can compensate for the downside in our price estimate due to decline in gross margins. A higher increase in revenues can lead to an upside in our price estimate.
The company is likely to discontinue its discount coupons once the membership plan is launched on a large scale. It is possible as well that this might impact revenues over the short term. Still, we believe from a long-term perspective the membership plan strategy holds strong promise. As Bed Bath and Beyond struggles to establish a strong user base and compete with online retailers, this strategy can bear fruit in the long term.
Disclosure: No positions.