Where Is Bed Bath & Beyond’s Store Count Headed?

Specialty retailer Bed Bath & Beyond (NASDAQ:BBBY) operates a variety of businesses in the U.S., which have been doing reasonably well. This is evident from the fact that the company’s comparable store sales growth has averaged around 4.5% for the past four years. To maintain this growth momentum, Bed Bath & Beyond is focusing on sustaining its customer service excellence and developing a sound omni-channel platform. While same store sales is an important factor for the retailer, its ability to open new stores also plays a vital role in its growth. In this analysis, we look at Bed Bath & Beyond’s expansion across different segments and their probable future.

Bed Bath & Beyond has expanded its namesake stores at a steady pace over the past and is likely to continue following the same strategy. For World Market stores, the retailer will plan its expansion carefully in order to dilute the threat of self-cannibalization. Its Christmas Tree Shops’ expansion has been slow so far, but the market holds good potential for them. The U.S. market also presents healthy room for growth for buybuy Baby stores, but we expect Harmon & Harmon Face Values‘ expansion to remain slow. However, there exists an opportunity for the company to step up the expansion of Bed Bath & Beyond, Christmas Tree Shops, and buybuy Baby. If Bed Bath & Beyond takes advantage of this opportunity, there can be about 10% upside in its value.

Our price estimate for Bed Bath & Beyond stands at $ 75, implying a premium of less than 15% to the market price.

See our complete analysis for Bed Bath & Beyond

Bed Bath & Beyond Stores

Through its namesake stores, Bed Bath & Beyond offers a large array of bed linens, bath items, kitchen ware, furniture and other home furnishing products. These stores have a wide presence in the U.S. with over 1,017 stores spread throughout the country. Despite the substantial presence, the company believes that the market can hold more than 1,300 such stores. Therefore, we believe that Bed Bath & Beyond’s expansion will continue, albeit at a slower pace. The retailer opened about 11 stores on average during the last three years and added another three stores during the first two quarters of fiscal 2013. Going forward, we believe that the company will open six-seven stores on average every year for the next five-six years.

World Market Stores

Bed Bath & Beyond acquired 258 World Market stores (Cost Plus) back in June 2012, and increased their store count to 269 by the end of Q2 fiscal 2014. 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. It had already identified several locations within its existing markets which will help World Market’s expansion.

However, given the similarity between Bed Bath & Beyond’s and World Market’s product offerings, the retailer might not want to expand World Market stores in those areas where its namesake brand already has a strong presence to negate the threat of self-cannibalization. Hence, we expect the expansion pace to be slower and forecast an addition of seven-eight such stores annually.

Christmas Tree Shops

With their appealing product offerings and architectural theme, Christmas Tree Shops (CTS) provide a fun shopping experience for customers. Although CTS’ presence is currently limited to 78 stores, it has a good growth potential in the U.S. Most of its stores are located across the East Coast, which leaves a large area untapped. Moreover, its main competitor, Dollar Tree, operates close to 5,000 stores. Even though Dollar Tree’s product range is more diverse, there is still a sizable expansion opportunity for the specialty store. Interestingly, these stores generate significantly higher revenue per store as compared to Bed Bath & Beyond and buybuy Baby stores, which justifies their expansion.

However, this segment has expanded at a slow pace over the past fiver years, opening just five stores annually. Therefore, we forecast an addition of just four stores every year. Nevertheless, we believe that CTS are capable of expanding at a much faster pace if the company realizes its true potential.

buybuy Baby

Since its acquisition in 2007, buybuy Baby has expanded at a higher rate compared to Bed Bath & Beyond’s other stores, increasing its store count from 9 to 92. We expect this trend to continue as the business has significant room for growth considering the widespread presence of its rival Babies”R”Us, which operates over 870 stores in the U.S. Moreover, buybuy Baby’s geographical reach is limited to only 29 states and still has 21 states into which to expand. According to our forecast, Bed Bath & Beyond can open somewhere around eight stores annually over the course of next five-six years.

Harmon & Harmon Face Values

Harmon & Harmon Face Values is the smallest of Bed Bath & Beyond’s businesses with only 50 stores as of Q2 fiscal 2014. Historically, its expansion has been slow as the company has opened just two stores on average during the last four years. Since Bed Bath & Beyond is more focused on adding HFV store-in-store locations across its different store concepts, we expect its expansion to remain slow. We forecast that the retailer will open two to three HFV stores every year through the end of our forecast period.

What Will Happen if the Company Steps up its Expansion

We project the number of Bed Bath & Beyond stores to reach 1,065 by 2021. However, if the company decides to step up its namesake store expansion in the U.S. and enters some international markets, its store count can be higher. If it adds 10 stores annually instead of six that we currently forecast, its store count towards the end of our forecast period will cross 1,090. We believe that Bed Bath & Beyond can expand its Christmas Tree Shops faster than what it has done over the past few years. If the retailer opens eight stores annually for the next five-six years, the CTS count will reach 140, which seems achievable given the market potential. Similarly, if the company opens 15 buybuy Baby stores every year encouraged by the growth opportunities, its store total will reach 210 by 2020.

Making these adjustments in our pricing model, we get close to 10% upside to our price estimate. Although this scenario is a possibility, it remains to be seen if the company decides to step up its expansion amid the prevailing economic weakness in the U.S.

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