Falling Foot Traffic Keeping Housing Recovery From Driving Bed Bath & Beyond’s Near Term Growth

Bed Bath & Beyond‘s (NASDAQ:BBBY) stock has fallen significantly over the last six months due to consecutive quarters of earnings misses. Hurt by weak holiday sales and an extremely small online channel, the company’s fiscal Q3 growth failed to meet consensus estimates. This trend persisted in the fourth quarter as Bed Bath & Beyond’s sales were weighed down by sluggish consumer spending, a slowing housing recovery, relentless cold weather and heightened competition from online giant Amazon (NASDAQ:AMZN). Even in fiscal Q1, the retailer’s earnings fell short of market expectations due to high operating expenses and an increase in coupon redemptions.

Even though Bed Bath & Beyond is the strongest home goods retailer in the U.S., its near-term performance is likely to remain under pressure. While an improvement in the housing market would imply an increase in Bed Bath & Beyond’s potential customers, declines in foot traffic on account of a gradual customer shift to the online channel is a worry for the company.

Following a slight slowdown in the first quarter of 2014, home sales in the U.S. have improved significantly, which is good news for Bed Bath & Beyond. However, an increasing number of buyers are purchasing online these days, which is resulting in a fall in foot traffic. This can work against the retailer given that it relies on store sales for more than 95% of its revenues.

Our price estimate for Bed Bath & Beyond stands at $79, implying a premium of over 25% to the market price.

See our complete analysis for Bed Bath & Beyond

Improvement In Home Sales Can Provide A Push

Due to the overall slowdown in economic activity, along with high lending rates, sales of existing homes declined from a seasonally adjusted annual rate (SAAR) of 4.87 million in December to 4.62 million in January, 4.60 million in February and 4.59 million in March. ^[1] In fact, sales in March represented a year-over-year decline of 7.5%. New home sales also remained low, and they fell to a SAAR of 384,000 in March, from 449,000 in February. However, following a slump in the first quarter, house sales have picked up in the U.S. Existing homes sales improved in both April and May to reach a SAAR of 4.89 million, which is its highest value since October last year, albeit 5% lower than May 2013 levels.

On the new home front, sales rose to a SAAR of 504,000 in May, up an impressive 17% year-over-year, and the highest sales figure in the last twelve months. The housing market appears to be gaining some stability in growth driven by falling lending rates, better employment conditions, and improving consumer affordability. According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage declined to 4.12% in the first week of July from 4.53% in early January. ^[2] Although the average rate rose in the first week of August, the increase was a paltry 2 basis points. Potential home buyers have looked to take advantage of the lowered borrowing costs, which has boosted home sales. Lending rates had previously been on a rise since the first half of last year, fueled by the Federal Reserve’s announcement of a reduction in bond purchases, which had kept the long-term interest rates low. ^[3]

Home sales are also impacted by the general business environment, which affects job creation and incomes. The U.S. unemployment rate fell to 6.1% in June, the lowest rate since the recession set in. ^[4] Most of Bed Bath & Beyond’s customers are new and existing home buyers, and the company could see an increase in the number of potential customers in the near term owing to the improving environment.

Fall In Foot Traffic Could Overshadow Housing Recovery

Due to the increased proliferation of smartphones and tablets, and the convenience of online shopping, U.S. buyers have been making more purchases online. Subsequently, they are visiting fewer stores, which is a concern for a number of retailers who do not have a sizable online presence. As per the data compiled by ShopperTrak, a firm that tracks store traffic in over 40,000 outlets across the U.S., store visits have fallen consistently by close to 5% year-over-year in all the months of the past two years. This trend continued in July, as 5% fewer shoppers went out to shop, which impacted the sales of retailers such as Costco (NASDAQ:COST), Wal-Mart (NYSE:WMT) and Bed Bath & Beyond, who rely on store sales for a bulk of their revenues. ^[5] It must be noted that even though Bed Bath & Beyond’s online sales might have increased considerably, a fall in foot traffic can easily negate it.

Store traffic across the U.S. retail market has fallen regularly during the past couple of years and we see no reason why it won’t continue in the future. Several retailers have ramped up their investments in omni-channel retailing in response to the online shift. While Bed Bath & Beyond is also making significant strides on this front, it will be a while before it sees any measurable results. Meanwhile, in an effort to offset the store traffic decline, the retailer might look to aggressively push its 20% discount coupons for attracting buyers, which can weigh heavily on its sales.

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1. “New and existing home sales, U.S.“, National Association of Home Builders [↩]
2. Mortgage rates for 30-year U.S. loans fall for third week, July 2014, bloomberg.com [↩]
3. historical 30-year fixed-rate [↩]
4. U.S. unemployment data [↩]
5. Gap, L Brands Drive July Retail Sales, The Wall Street Journal, Aug 7 2014 [↩]