Improving Jobs And Housing Market Good News For Bed Bath & Beyond

For the retailers in the United States, 2015 began on a challenging note. In the first three months of 2015, retail sales growth remained relatively flat even as consumers witnessed additional savings due to lower gas prices. This was because even though the total number of jobs was improving slowly, the average wage growth remained relatively flat, disincentivizing consumers from engaging in discretionary spending. In a post-recessionary environment, customers continued to remain more inclined to saving over spending, as a consequence of which most retailers saw sluggish top-line growth. Retailers operating globally faced the additional brunt of a stronger dollar over this time period, which weighed down their reported numbers further.

However, the past two months are indicating a changing scenario for the retail sector. The number of jobs has been increasing faster on a month-on-month basis and wage rates are finally starting to witness a significant rise as well. Consumers’ propensity to spend is hence on the rise, as a result of which retail sales are also expected to witness an increase. The retail sales numbers for May will be released today, and the consensus is that these numbers will show a 1.1% increase in retail sales, primarily driven by an improvement in the U.S. job market. ^[1]

At Bed Bath & Beyond (NASDAQ:BBBY) these less-than-favorable macroeconomic conditions coupled with incremental operating expenses related to expansion of its omni-channel model put pressure on margins in the beginning of the year. In Q4 fiscal 2014, which ended on February 28, 2015, the retailer reported a 3.7% decline in net earnings. Gross margins declined by 80 basis points year-over-year in the same time period.

Our price estimate for Bed Bath & Beyond is $70.29, approximately in line with its current market price.

See our complete analysis for Bed Bath & Beyond here

Improving Job Market Will Push Retail Sales

Even as the economy seemed to slump in the first quarter of this year, the number of jobs added in the economy witnessed growth, though slowly. The slowdown in this quarter is being attributed to temporary factors such as harsh weather conditions and the west coast port disruptions. Moving forward, as we go through the second quarter of the year, things have started to look up. Now that the winter is behind us, the economy is starting to gear up for growth again. Over the three-month period between January and March, the number of jobs added in the U.S. stood at approximately 150,000. On the other hand, the number of jobs added in April alone stood at 182,000 new jobs, resonating the growth sentiment. This trend continued to increase in May when 263,000 new jobs were added in the U.S. economy. ^[2]

The Number of Employed Persons Saw Higher Rate of Growth After March 2015

The better news is that the overall growth in the number of jobs is being accompanied with an overall increase in wage rates as well. Hourly wages in May increased by 0.3% moving to $24.96 per hour. On a year-over-year basis, this reflects a 2.3% increase in hourly wages, making it reach its highest levels since mid-2013. ^[3] This translates into strengthening labor market conditions, which are required to support a growing economy.

As consumers are witnessing an increase in their income, their confidence is also starting to surge. In the latest consumer confidence report, a moderate 1.1% increase was noted in the consumer confidence index between April and May. The present situation index, which measures overall consumer sentiment towards the present economic situation, ^[4] witnessed a rise as well after declining for three months in a row. The moderate rise in consumer confidence index indicates that though there is an improvement consumers still remain cautious. This is expected to improve with the expected growth in jobs and wages. ^[5]

Housing Market In The U.S. Is Also Witnessing Growth

Besides the overall trends in the economy, Bed Bath & Beyond’s growth is specifically tied to the performance of the housing market in the U.S. as well. As the overall indicators in the economy are showing signs of growth, the housing market is also seen to be responding positively. New home sales through April have seen a 22.4% rise on a year-over-year basis. ^[6] The median price of homes sold in April witnessed an 8.3% increase year over year. As the job market is improving and renting a home is becoming more expensive, more people are flocking to purchasing new homes. ^[7] This is particularly good news for Bed Bath & Beyond, as customers who are furnishing new homes spend larger amounts at the store as opposed to customers who are engaging in partial refurnishing of their existing homes.

Overall, a growing economy and higher level of activity in the housing market results in more people shopping at Bed Bath & Beyond outlets, boosting their top-line growth. As the company expects expansion related costs to continue through 2015, the faster top-line growth will help relieve some of the pressure on gross and net margins, which is welcome news for the retailer.

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1. Dollar edges up, traders eye US retail report, Reuters [↩]
2. United States Employed Persons, Trading Economics [↩]
3. U.S. hourly wages rise 0.3% in May, 2.3% in past year, Market Watch [↩]
4. Present Situation Index, Investopedia [↩]
5. The Conference Board Consumer Confidence Index Increases, The Conference Board [↩]
6. Who Will Profit the Most From a U.S. Housing Boom, The Motley Fool [↩]
7. U.S. New Home Sales, Prices Climb, The Wall Street Journal [↩]