Improving Housing Industry Can Bring Good Times For Bed Bath & Beyond

Bed Bath & Beyond (NASDAQ:BBBY) is one of the largest specialty retailers of home furnishings and bath and linen related items in the U.S. The retailer has a wide reach with over 1,300 stores in 50 states in the U.S., Puerto Rico and Canada. Most of its product assortments are directly related to home furnishing such as bed linens, kitchenware, sofa, tables and home decor items. Bed Bath & Beyond’s customers include new home buyers and customers looking to remodel their existing homes.

In recent months, the housing industry in the U.S. has grown rapidly.  Although it is well below the pre-recession level, the growth rate was the highest in the past four years. ^[1] We believe the surge in the housing industry will complement Bed Bath & Beyond’s growth. However, shifting consumer preferences to electronics items might have a mitigating effect on the retailer.

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How Bed Bath & Beyond Depends On The Housing Industry

Bed Bath & Beyond mainly offers products in four categories: bed linens and related goods, bath, kitchenware, and furniture. Three out of these four categories are directly related to home decor and furnishing. Hence, it is quite evident that Bed Bath & Beyond’s sales are dependent on consumer spending on home furnishing, which is directly influenced by the housing industry. Customers who own a home are more likely to spend on home furnishing than ones who rent. Moreover, with the addition of World Market stores’ unique and distinctive product offerings to Bed Bath & Beyond’s product assortments, we believe more customers will visit Bed Bath & Beyond instead of other specialty retailers.

Housing Industry Is Improving

The Commerce Department in the U.S. recently reported that the housing starts in the U.S. increased by 3.6% in October. ^[1] The number of new households in 2012 is now expected to be somewhere around 894,000, which is the highest in the last four years. ^[1] In a healthy economy, this figure is around 1.2 million a year, which was the case in 2007. ^[2] Since then, it has drastically reduced to 635,000 in 2011. Moreover, the average number of new households was approximately 570,000 during 2007-2011 period. Sales of previously owned homes also improved significantly and were the highest in the past six years. ^[2] These factors indicate that the housing industry is improving overall.

This improvement can be attributed to the gradually improving economy and an increase in the number of people looking to buy houses. ^[2] We believe that with this increase, more people will be spending money in Bed Bath & Beyond and other specialty stores for furnishing, bedding and decor items. However, in the digital age, consumers may be more inclined to furnish their homes with an HDTV or other home-related electronic items instead of sofa sets or bed linens.

Our price estimate for Bed Bath & Beyond stands at $ 75, implying a premium of about 25% to the market price.

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1. U.S. housing, Economist, Nov 21 2012 [↩] [↩] [↩]
2. Steady US housing recovery is boosting economy, Businessweek, Nov 19 2012 [↩] [↩] [↩]