Why Bed Bath & Beyond Will Make It Through This Rough Phase

Due to consecutive quarters of earnings misses,  Bed Bath & Beyond‘s (NASDAQ:BBBY) stock has fallen by almost 30% during the last six months. The company reported slower-than-expected growth in Q3 sales, somewhat shy of consensus, on account of a weak holiday season and a small online channel. In Q4 fiscal 2013, Bed Bath & Beyond once again reported weak results and issued bleak guidance for the first quarter due to sluggish consumer spending, a slowing housing recovery, relentless cold weather and heightened competition from online giant Amazon (NASDAQ:AMZN). The retailer’s troubles persisted in Q1 fiscal 2014 as its earnings fell short of market expectations due to high operating expenses and an  increase in coupon redemption.

While the company’s near-term performance is likely to remain under pressure, we believe that it can regain its lost momentum in the medium-to-long term. Bed Bath & Beyond still remains the strongest home goods retailer with an expansive product variety and inimitable understanding of customer needs. Despite being a specialty retailer, Bed Bath & Beyond’s products aren’t too expensive as compared to Amazon, and it positions it very well to fend off competition from the online giant. By effectively leveraging these aspects of its business, Bed Bath & Beyond should be able to drive sales higher and recover from its slump.

Our price estimate for Bed Bath & Beyond stands at $78.80, implying a premium of over 35% to the market price.

See our complete analysis for Bed Bath & Beyond

High On Customer Satisfaction

For many years, Bed Bath & Beyond has been one of the most sought-after stops for home goods shopping due to its vast product range. During the last 10-12 years, the retailer has acquired different business concepts to add a greater depth to its portfolio of retail chains. The company acquired Harmon stores in 2002, which added health and beauty care products to its portfolio. Soon after Harmon, Bed Bath & Beyond acquired the Christmas Tree Shops, which offers home decor, home furnishing and gift items. The retailer has grown this concept from 23 stores at the time of acquisition to 77 stores currently. In 2007, the company bought buybuy Baby to add baby products and children’s accessories to its arsenal. Bed Bath & Beyond’s last acquisition was World Market, whose products are similar in nature to Bed Bath & Beyond’s but still have a unique appeal.

The company’s decentralized management culture leverages the knowledge, independence and customer focus of its store associates to offer products in accordance to the regional and chain-specific tastes. It enables the retailer to better understand its customers’ needs and respond accordingly. Moreover, while shopping at Bed Bath & Beyond, customers are often tempted to buy more when they have so many options to choose from. Tall shelves filled with a variety of merchandise not only help customers find products best suited to their liking but also induce impulse buying.

Bed Bath & Beyond also focuses on providing its customers with an enticing shopping experience. Since buyers shop for home furnishing products only occasionally, in-store experience is very important. A number of the retailer’s Christmas Tree Shops resemble older buildings in Colonial and Victorian architectural style. Its World Market stores are filled with creative and colorful presentations, with goods displayed in open crates and barrels. The products are categorized in various separate “shops” within the store. In some states, these stores also have wine and coffee tasting along with other food assortments. Additionally, Bed Bath & Beyond is adding food and beverages section to some of its namesake stores to further elevate the shopping experience.

Considering its appealing shopping environment and vast product variety, we believe that the retailer’s recent troubles have nothing to do with loss of customers. Frail market conditions are primarily responsible for Bed Bath & Beyond’s recent fumble, which will get better eventually, putting the retailer in a better position to drive store traffic.

Well Positioned To Compete Against Amazon

In addition to offering attractive products, Bed Bath & Beyond keeps its prices comparable with other popular retailers to ensure the best deals for its customers. Although it is difficult to compete with online giant Amazon over prices, Bed Bath & Beyond has managed to do so. According to Oppenheimer analyst Brian Nagel, Bed Bath & Beyond’s prices are 15% lower (on average) than that of Amazon’s after incorporating the home goods retailer’s 20% discount coupon. Moreover, while Amazon’s prices are 7% lower on average excluding sales taxes, it is at par with Bed Bath & Beyond once taxes are included. ^[1]

Considering that the home goods retailer has a better product range than Amazon, lower or comparative prices gives it a competitive edge over the online retailer. Moreover, it positions Bed Bath & Beyond better to curb the growing threat of showrooming from Amazon. Wal-Mart (NYSE:WMT) may offer the lowest prices in the market, but its product variety, quality and shopping experience cannot match that of Bed Bath & Beyond. Hence, we believe that the home goods retailer is well-poised in terms of pricing to continue driving store traffic.

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1. Can Bed Bath & Beyond, Inc. Effectively Compete With Amazon.com, iStockAnalyst, Mar 19 2013 [↩]