Bed Bath & Beyond’s Earnings: Steady Results Confirm Better Outlook

June 28th, 2013 by Trefis Team
+4846.18%
Upside
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3.90
Trefis
BBBY: Bed Bath & Beyond logo
BBBY
Bed Bath & Beyond

Quick Take

  • Bed Bath & Beyond’s revenues and comparable store sales increased by 17.8% and 3.4% respectively in Q1 fiscal 2013.
  • The long term outlook is good as the retailer is focusing on targeted expansion in the U.S., providing better customer service and improving online sales.
  • The U.S. market still holds growth opportunity for Bed Bath & Beyond’s namesake stores, World Market stores, buybuy Baby and Christmas Tree Shops.
  • Bed Bath & Beyond’s decentralized management culture remains the core of its good customer service, which the company is improving through discount coupons, store renovations and addition of food & beverages section.
  • The anticipated growth in online retail industry, efforts to revamp online channel and omni-channel retailing will complement the growth of Bed Bath & Beyond’s e-commerce channel.

Bed Bath & Beyond‘s (NASDAQ:BBBY) recently reported Q1 fiscal 2013 earnings reflected steady growth backed by its strong market position. The retailer’s revenues and comparable store sales increased by 17.8% and 3.4% respectively, and the company expects its good performance to continue throughout the year. [1] Even the long term outlook looks positive as the retailer expands strategically in the U.S. and focuses more on improving customer service and boosting its online sales.

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See our complete analysis for Bed Bath & Beyond

Strategic Expansion In The U.S.

Bed Bath & Beyond: Bed Bath & Beyond already has a large presence in the U.S., which puts aggressive expansion out of the picture. Yet, the retailer has some growth opportunity for all its businesses. During the first quarter, it opened four Bed Bath & Beyond stores bringing its total to 1,008 stores. The company believes that the U.S. market has potential to hold more than 1,300 such stores stores and therefore, the expansion will continue. [1]

World Market: Bed Bath & Beyond acquired 258 World Market stores (Cost Plus) back in June 2012, and increased their store count to 266 by the end of Q1 fiscal 2013. [2] [1] Before the acquisition, Cost Plus had planned to open 15-20 stores annually. According to the company, the two state-of-the-art one million square feet distribution centers across each coast were sufficient to support 100 new stores without any significant additional costs. [3] It has already identified several locations within its existing markets which will help World Market’s expansion.

Given the similarity between Bed Bath & Beyond’s and World Market’s product offerings, we forecast an addition of 10 such stores annually. The expansion is likely to be slower as the retailer might not want to expand World Market stores in those areas where its namesake brand already has a strong presence. This will help it avoid the risk of self-cannibalization.

Christmas Tree Shops: With their appealing product offerings and architectural theme, Christmas Tree Shops (CTS) provide a fun shopping experience for its customers. Although CTS’ presence is currently limited to 73 stores, there exists a good potential for its growth in the U.S. [1] Most of its stores are located across the East Coast, which leaves a large area untapped. Moreover, its main competitor Dollar Tree operates more than 4,600 stores. [4] Even though Dollar Tree’s product range is more diverse, there is still a sizable expansion opportunity for specialty stores such as CTS. Interestingly, these stores generate significantly higher revenue per store as compared to Bed Bath & Beyond and buybuy Baby stores, which justifies their expansion.

buybuy Baby: Since its acquisition in 2007, buybuy Baby has expanded at a higher rate compared to the retailer’s other stores, increasing its store count from 9 to 84. [5] We expect this trend to continue as this business has a significant room for growth considering the widespread presence of its rival Babies”R”Us, which operates over 850 stores in the U.S. [6] Moreover, buybuy Baby’s geographical reach is limited to only 29 states, and it still has 21 states to explore. [5]

Harmon & Harmon Face Values: This is the smallest of Bed Bath & Beyond’s businesses with only 48 stores as of Q1 fiscal 2013. [1] The company plans to continue to open free standing Harmon & Harmon Face Value stores, and add health and beauty care products across all other store concepts. Overall, Bed Bath & Beyond plans to open 30+ stores across all its businesses in fiscal 2013, nine of which it opened in the first quarter. [1]

Good Customer Service

So far, Bed Bath & Beyond has been successful in providing good customer service with the help of its decentralized management structure. The company usually hires local people and leverages their knowledge to serve its customers better. [7] This also helps in responding quickly to changing demands and economic conditions of different markets. [1] Additionally, Bed Bath & Beyond is constantly increasing as well as differentiating its merchandise assortments to provide broader sets of products. [1] It is also investing in technology to enhance shopping experience through different channels such as online, mobile and social media.

Bed Bath & Beyond is renovating and relocating its stores to align them with changing market conditions and customer tastes. [1] Also, it is placing food and beverages section in many of its stores to elevate shopping experience. The company’s discount coupons are becoming popular among its customers, and they are increasingly redeeming them. As a result, there was a slight dip in the company’s gross margins in the first quarter. [1]

Efforts To Boost Online Business

Although online retail industry in the U.S. is set to grow at a healthy pace, Bed Bath & Beyond is still lagging behind as it earns just 1%-2% of its revenues from online channel. However, the company is making some notable 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. [8] Bed Bath & Beyond is exploring omni-channel possibilities to provide its customers with a seamless shopping experience irrespective of the channel they prefer. The company is replacing its back-end and customer-facing systems for its websites to make them more efficient. Recently, it launched a new website for buybuy Baby and is on track to introduce a rejuvenated Bed Bath & Beyond website by the end of Q2 fiscal 2013. [1]

Our price estimate for Bed Bath & Beyond stands at $75, implying a premium of about 10% to the market price.

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Notes:
  1. Bed Bath & Beyond Q1 fiscal 2013 earnings transcript, Jun 26 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
  2. Bed Bath & Beyond Reaches Agreement To Acquire Cost Plus, Inc., Bed Bath & Beyond, May 9 2012 [↩]
  3. Cost Plus’ SEC filings [↩]
  4. Dollar Tree’s 10k [↩]
  5. Bed Bath & Beyond’s SEC filings [↩] [↩]
  6. Babies”R”Us’ SEC filings [↩]
  7. Corporate Responsibility Report, Bed Bath & Beyond [↩]
  8. Bed Bath & Beyond Q4 fiscal 2012 earnings transcript, April 10 2013 [↩]