Despite Negative Comps, Physical Stores Are Vital To Bed Bath & Beyond’s Growth

The last few quarters for Bed Bath & Beyond (BBBY) were marked by stagnating sales, contracting gross margins and increasing operating costs. Fortunately, though, sales growth from customer-facing digital channels remained strong, almost single-handedly driving the company’s top line upward.

We believe the negative growth in comparable store sales (sales in stores open for at least a year) is not an indication of a sales slowdown, but is rather an indication of a shift in consumer habits. As store-visiting customers buy on the company’s mobile app rather than purchasing it in-store, purchases are accounted for as digital channel sales and hence give the appearance of weakness in store sales.

To take advantage of this habit among consumers, Bed Bath & Beyond is focusing on attracting more customers to its stores while at the same time building a strong online channel, through which the sale occurs eventually. In the long-run, this strategy will help the company win customers back from online retailers, as they cultivate a habit of visiting stores rather than browsing for products online. Below, in this article, we discuss how these trends impacted the company’s recent quarter performance as well as their long-term implications.

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IT Investments Weigh On Margins But Will Drive Future Growth

Bed Bath & Beyond had seen a contraction of about 70 basis points in its gross margin, in the past few quarters (on average). In the most recent one, it decreased to 38.1% from 38.5% an year-ago, primarily due to an increase in the number of coupon redemptions. Also, the company’s continued investments in technology resulted in a further margin contraction, as SG&A expenses increased by 40 basis points to 26.4% of net sales.

While IT investments might affect margins in the short term, they are essential to executing the company’s long-term strategy. Online sales are already driving a bulk of top line growth for the company and with time, their importance will only increase. Growth in the company’s digital channel is also driving the need to have a strong distribution network. BBBY plans to add additional retail distribution centers during fiscal 2016, through which the company will ship merchandise to both stores and customers. A strong digital channel will likely help BBBY reduce losses arising from showrooming, as customers’ make purchases through the company’s website or mobile app rather than through competitors’.

In-store Sales Were Weak, But Play A Vital Role Generating Online Sales

In the most recent quarter, BBBY’s comparable sales growth dropped to 0.7% versus 3.4% a year ago. As the company continues to invest in its omni-channel model, comparable sales growth from the online channel ranged between 25% and 50% in the previous few quarters.

What is interesting is that existing stores are seeing fewer sales than before, as they declined 1% in this quarter, compared to a year ago. It is likely that the decline has more to do with how the company accounts for different ways customers purchase products. For example, if an item is purchased online and returned to a store, it results in a reduction in store sales. Similarly, purchases made on mobile while customers browse through their stores are treated as a mobile sale. As a result, a portion of purchases made by store-visiting customers end up being counted as digital channel sales. Therefore, as long as overall sales grow at a healthy pace (2% in the previous quarter), flat or slightly negative store comps is nothing to be worried about.

To capitalize on this type of behavior, BBBY is focusing its investments on improving in-store customer experience. For example, it has come up with options such as buy online and pick up in-store, buy online and return to store, and online appointment scheduling that encourage customers to visit stores. Sales associates also play a key role in this process as customers often look for advice while buying, for example, furniture. This way, BBBY aims to create more reasons for customers to visit stores vs. making a purchase online, which will likely increase the visibility of the company’s product lines and drive additional sales.

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