Bed Bath & Beyond Benefits As Housing Recovery Gains Steam

Bed Bath & Beyond‘s (NASDAQ:BBBY) stock has increased by 25% since July 2014, on account of consistent housing recovery and steady topline growth. While the company’s margins remain a concern, its revenues have grown steadily amid an uncertain retail environment. Its strong market position in the home goods industry has helped Bed Bath & Beyond take advantage of the rising home sales. Sales of new and existing homes have improved significantly over the last year, which has fueled the demand for home furnishing and decor related items. Moreover, rising consumer confidence and falling unemployment rates have encouraged buyers to open up their wallets.

In this analysis, we focus on a specific period (August-October) to analyse various industry specific metrics to understand the home goods retailer’s recent performance.

Our price estimate for Bed Bath & Beyond stands at $75, implying a premium of less than 5% to the current market price.

See our complete analysis for Bed Bath & Beyond

New And Existing Home Sales Have Accelerated

Home goods retailers are impacted by the number of house sales, as new occupants tend to spend more on home improvement, decor and furnishing items. Following the first quarter, house sales have picked up in the U.S., with existing home sales reaching a seasonally adjusted annual rate (SAAR) of 5.05 million in August, 5.18 million in September and 5.26 million in October. The figure for October is the highest sales figure in over a year. In fact, it was also higher than the overall adjusted figure of 5.07 million for 2013. New home sales also rose to a SAAR of 453,000 in August, 455,000 in September and 458,000 in October. All the three figures were more than the adjusted figure of 430,000 for 2013. ^[1] We believe that increases in new and existing home purchases in the last few months have helped home goods retailers such as Bed Bath & Beyond improve their sales.

Another statistic that augurs well for the U.S. housing industry, and in turn for the home furnishing market, is the rising builder confidence index. The figure stood at 55 in August and soared to a nine-year high of 59 in September. ^{[2] [3]} Although builder confidence index eased back to 54 in October, it quickly recovered to 58 in November, indicating sustainable recovery in the housing market. ^[4] National Association of Home Builders’ Chief Economist said that while there was a brief lull in October, the housing market remains strong, owing to steady job gains, low mortgage rates and significant pent up demand. ^[5] It must be noted that a reading of over 50 is considered a sign of belief among builders that new home sales will rise going forward, which paints a pleasing picture for home improvement retailers such as Bed Bath & Beyond.

Mortgage Rates Have Been Low

According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage was around 4.1% during the August-October period, which was well below the figures in the same period last year. ^[6] Potential home buyers have looked to take advantage of the lowered borrowing costs, which has resulted in an increase in home sales. Going forward, lending rates are expected to rise, fueled by the Federal Reserve’s announcement of reduction in bond purchases, which had kept the long-term interest rates low. ^[7] The rates haven’t risen as aggressively as they did mid-last year, when the Fed first announced a reduction in bond purchases. However, the average rate for a 30-year fixed-rate mortgage is expected to rise to 5.1% by the end of 2015, which could further prompt house purchases in the near term, consequently boosting home goods sales. ^[8]

Better Job Scenario Is Prompting Higher Spending

Following a 2.1% contraction in the U.S. GDP in Q1, the country’s GDP returned to positive growth in the second and third quarters, increasing by 4.6% and 3.5%, respectively. ^[9] In particular, the recent job growth, due to which the unemployment rate has been below 6% since September, fueled a rise in consumer spending by 1.8% in Q3. ^[10] It is worth noting that the unemployment rate was at 5.8% in October and November, which is its lowest level in more than five years. ^[11] This bodes well for the housing industry as job creation would facilitate income growth, which can subsequently boost spending on home decor and furnishing related items.

Bed Bath & Beyond’s Addressable Market Has Grown

Bed Bath & Beyond mainly sells home furnishing and linen related items through its more than 1,000 mainline stores. It also sells gift items, baby products, and health and personal care products, through its other brand stores. The calculate the addressable market for the retailer, we take into account overall sales of the following categories – “furniture and home furnishing” and “health and personal care”. During the period of August-October (data for November not yet available), the market grew at an average of 5.7% year over year, which is very promising. ^{[12] [13]} However, a bulk of this growth is attributable to the health and personal care market, where Bed Bath & Beyond’s presence is extremely small. Considering only the furniture and home furnishing market, the figure stands at 2.3%. If we incorporate fast growth in the health and personal care market, we can safely assume the average year over year growth for Bed Bath & Beyond’s target market during August-October to be less than 3%.

To deduce how much of that growth Bed Bath & Beyond was able to capture, we compare the retailer’s Q2 sales growth with the industry growth. Using the same analysis, we conclude that the addressable market grew by around 3% in June-August quarter, which is Bed Bath & Beyond’s Q2. During the quarter, the retailer’s revenues increased by 4.3%. This indicates that being the biggest specialty retailer in this market, Bed Bath & Beyond is capable of exceeding the industry growth rates, and it might have done the same in the last three months.

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1. Housing Data, National Association of Home Builders [↩]
2. Builder Confidence Rises Two Points In August, NAHB, Aug 18 2014 [↩]
3. Builder Confidence Hits Highest Level Since November of 2005, NAHB, Sept 17 2014 [↩]
4. U.S. home builder confidence rose in November, The Wall Street Journal, Nov 18 2014 [↩]
5. Four-Month Upturn Ends as Builder Confidence Falls in October, NAHB, Oct 16 2014 [↩]
6. 30-year fixed-rate mortgages since 1971, Freddie Mac [↩]
7. historical 30-year fixed-rate, barchart [↩]
8. Mortgage Industry Predicts Interest Rates To Rise To 5.1% By End Of 2015, Urbanland Company, Nov 4 2014 [↩]
9. U.S. GDP growth rate, Trading Economics [↩]
10. U.S. unemployment data, Trading Economics [↩]
11. Unemployment Rate, Bureau of Labor Statistics [↩]
12. Furniture and Home Furnishing, United States Census Bureau [↩]
13. Health & Personal Care Stores, United States Census Bureau [↩]