Bed Bath & Beyond Slashes Its Q4 Outlook On Bad Weather; Amazon Might Be The Secret Gainer

Last week, home goods retailer Bed Bath & Beyond (NASDAQ:BBBY) lowered its outlook for the fourth quarter on account of adverse weather conditions in the U.S. Due to extreme cold and winter storms, the company witnessed a number of full-day and partial store closures, along with a significant decline in the U.S. foot traffic. ^[1] Bed Bath & Beyond is the latest addition to the list of U.S. retailers who have struggled in the fourth quarter due to bad weather.

As the company blamed unfavorable climate for its weak sales, we believe that Amazon (NASDAQ:AMZN) might have driven a lot of customers away from Bed Bath & Beyond stores to its websites. Since store visits came down drastically due to severe cold, U.S. buyers stayed home and bought more online. Amazon’s dominion in the online channel made it the prime shopping destination during the holiday season, which is evident from its 20% revenue growth in the fourth quarter.

Bed Bath & Beyond faces the biggest risk from Amazon’s “showrooming,” which suggests that buyers know both these retailers very well. As U.S. shoppers seldom had the option to visit a Bed Bath & Beyond store during the fourth quarter, they might have shopped at Amazon instead, given that the home goods retailer’s online channel isn’t well developed.

Our price estimate for Bed Bath & Beyond stands at $78.80, implying a premium of about 15% to the market price.

See our complete analysis for Bed Bath & Beyond

Bad Weather Resulted In Low Store Traffic

In a recent business update, Bed Bath & Beyond stated that the relentless weather in the U.S. led to 464 days of full-day store closures and 1,923 partial closures. This resulted in a negative impact of 2.o-2.5 percentage points on its comparable store sales growth, with a corresponding hit of $0.06-$0.07 on its EPS. The retailer now expects its comparable sales growth to remain low at 1.7%,  as opposed to its previous guidance of 2%-4%. Bed Bath & Beyond also dragged its EPS guidance down to $1.57-$1.61 from $1.60-$1.67. ^[1]

Apart from store closures, a substantial fall in foot traffic also contributed to the retailer’s weak sales. As persistent cold in the U.S. prevented buyers from completing their store shopping, U.S. foot traffic declined by 17.7% in December. ^[2] This trend continued in January as overall retail sales fell by o.4% from a month earlier. ^[3]

Amazon’s Gains On Bed Bath & Beyond’s Losses Is A Worry For The Latter

The U.S. retail industry witnessed a surge in online orders during December as bad weather prevented store visits. This is evident from the fact that United Parcel Service (NYSE:UPS), one of the biggest players in e-commerce delivery, struggled to ship orders on time. ^[4] Abercrombie & Fitch (NYSE:ANF), which usually earns close to 15% of its revenues from e-commerce business, saw this figure escalate to 25%. As extreme winters persisted in January and consumers in some parts of the country were confronted with sandstorms, store traffic remained low and online retail was strong. ^[3]

While this trend favored retailers such as Amazon, who attracted significant web traffic, smaller online players such as Bed Bath & Beyond were at the receiving end. Since U.S. buyers could not visit Bed Bath & Beyond stores as easily, they had the alternative of shopping at Amazon and Bed Bath & Beyond websites. We believe that Amazon might have been the preferred option out of the two since Bed Bath & Beyond’s online channel is small and has limited variety. Moreover, the retailer’s omni-channel platform is not well-developed, which prevents the effective utilization of store inventory for online orders.

This is not a good sign for Bed Bath & Beyond as it already faces fierce competition from Amazon. According to a survey conducted by Seattle-based startup Placed, Bed Bath & Beyond faces the greatest risk due to “showrooming”, even more than Best Buy (NYSE:BBY) and Target (NYSE:TGT). This study ranked Bed Bath & Beyond at the first position in the list of most-at-risk retailers as Amazon’s showroomers are 27% more likely to visit a Bed Bath & Beyond store. ^[5] This enhances the chances of the home goods retailer losing customers to the online giant. Moreover, if consumers shop at Amazon.com instead of Bed Bath & Beyond for long, their loyalties can shift towards Amazon. Therefore, we believe that Bed Bath & Beyond needs go proactive in the online segment to prevent the occurrence of such situations.

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1. Bed Bath & Beyond Inc. Provides Fourth Quarter Update, Bed Bath & Beyond, Mar 7 2014 [↩] [↩]
2. Retailing Today: December 2013, ShopperTrak, Jan 8 2014 [↩]
3. Retail Sales in U.S. Unexpectedly Fell 0.4% in January, Bloomberg, Feb 14 2014 [↩] [↩]
4. Behind UPS’s Christmas Eve Snafu, The Wall Street Journal, Dec 26 2013 [↩]
5. Placed Study Reveals Most-At-Risk Retailers For Showrooming By Amazon Customers, Placed, Feb 27 2013 [↩]