Bed Bath & Beyond Gears Up For Anticipated Growth Of Specialty Stores

While Bed Bath & Beyond’s (NYSE:BBBY) profits have declined over the past year, its revenues have registered growth. The retailer has compromised on its margins by providing additional discounts to its customers in order to increase its reach and is increasingly looking to enter online retailing. Specialty stores are gaining significant acceptance and Bed Bath & Beyond will look to utilize this to its advantage. Its revenue growth has been slightly lower than expected, mainly due to sluggish growth in U.S. consumer spending. However, with the improvement in U.S. housing market, the retailer’s strategy of gaining market share at the expense of short-term margin reduction will position it favorably for future growth.

See our complete analysis for Bed Bath & Beyond

Focus On Gaining Market Share

The retailer is looking to drive more traffic to its stores by offering discounts. While this has resulted in a slight shrinkage of profits, it has also helped increase the sales. In Q2 2012, the company’s revenues rose by 12% to $2.59 billion and comparable store sales by 3.5% compared to the same period in 2011. ^[1]

Bed, Bath & Beyond is looking to diversify its product range with the acquisition of Cost Plus, a furniture, food and gifts chain. It is also eying the online channel to increase its customer base and compete with online giant Amazon (NASDAQ:AMZN) and Target (NYSE:TGT). The acquisition of Cost Plus added 259 new stores and the company integrated Cost Plus’s food stores with its existing stores to drive more traffic. ^[2] The retailer continues to expand and will have 60% more stores by the end of fiscal 2012 compared to 2007. ^[3]

Specialty Stores Outperforming Traditional Departmental Stores

The consumer preferences have shifted from department stores to specialty stores. Specialty stores offer attractive prices and a wide variety of products whereas department stores offer a  specific product range which is often limited.

In 2008, trailing twelve months (TTM) revenues for specialty stores such as Bed Bath & Beyond, Kirkland’s, Pier 1 Imports and traditional stores such as JC Penny and Sears were roughly the same. ^[4] As of September 2012, while TTM revenues for Bed Bath & Beyond increased by 30%, the same for JC Penny and Sears fell by 15% and 20%, respectively. ^[4] This indicates a bright future for specialty stores such as Bed Bath & Beyond and justifies its strategy to gain market share.

Even during the economic slowdown of 2008 when the home furnishing industry recorded a decline of 20% in sales, BBBY registered positive revenue growth. ^[4] This can be attributed mainly to the bankruptcy of Linen ‘n Things, but the effective execution of its strategies such as decentralized management of stores and strong product offering and customer satisfaction were also the reasons for its survival.

As home ownership becomes more economical than renting, Bed Bath & Beyond’s sales will go further up and the marginal decline in profit margins will prove to be ineffective. Although in the short term, the company might experience slow growth due to stagnant U.S. consumer spending, gaining customers and thereby market share will position it favorably for long-term growth.

Our price estimate for Bed Bath & Beyond stands at $ 70, implying a premium of about 11% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Company’s SEC filings [↩]
2. Bed Bath & Beyond Drops as Profit Misses on Discounting, Bloomberg, Sept 20 2012 [↩]
3. Bed Bath Goes Beyond Peers, Wall Street Journal, Sept 18 2012 [↩]
4. Specialty Stores Will Dominate The Next Decade, The Motley Fool, Sept 10 2012 [↩] [↩] [↩]