Bed Bath and Beyond: An Update In Light Of the Recently Reported Quarter

Bed Bath & Beyond (NASDAQ:BBBY) recently reported its Q3 results for the fiscal year 2015.  (Fiscal years end with following February.)  Revenues for the first nine months of fiscal 2015 were mostly flat when compared to the same period last year. The situation has been more or less similar for the past 3 years.  To compound the company’s problems, same store sales also declined by 1% in the third quarter, compared to the same period in the previous year. This can be attributed to increased competition from online retailers such as Amazon, as well as a softer macroeconomic environment resulting from Fed’s hike of interest rates. However, we are still bullish about the company’s future prospects because of a variety of measures aimed at winning back customers who prefer online shopping by rolling out its own online offerings.

See our complete analysis for Bed Bath & Beyond

Increasing Competition From Online Retailers Amidst The Backdrop Of Weak Retail Environment

Bed Bath & Beyond’s performance was lackluster because of the soft retail environment. The Fed has hiked interest rates which have made mortgage loans and credit card loans costlier, thus negatively impacting spending on non-durable consumer goods.  Another key reason for lack of revenue growth was shifting buyer preferences, which are allowing online retailers such as Amazon to steal market share from well-established names in the retail space. However, Bed Bath & Beyond realizes this challenge, and is launching a plethora of measures in order to enhance its own online offerings. We take a look at these measures.

Key Steps Being Taken By The Company To Improve Profitability

Bed Bath & Beyond is making significant investments in the domains of IT, marketing, analytics and customer service in order to attract customers who prefer shopping online

It is increasing the net assortment of products being offered to its customers and aims to improve selection through a continuous process of customer feedback recorded through digital channels. The company recently introduced a social shopping feature which enables friends and relatives of users to find and recommend products of their liking. The company is spending a total of $350 million in order to ramp up its online offerings. It has introduced another feature called the online coupon wallet which enables customers to store, print and redeem their coupons online and makes shopping hassle free.

Are The Measures To Attract Digital Customers Working ?

Bed Bath & Beyond’s online customers have jumped nearly 25% as of the end of Q3, 2015.  The company has set record highs in internet traffic, conversion rates, online sales and average order values through its mobile channel segment.  Sales increased more than 2.5 times compared to the same period last year. However, there has been a marked increase in SG&A expenses as a percentage of gross profits due to increased advertising and payroll costs. However, we believe that the company has to make these investments in order to ensure its long term competitive positioning in the market and prevent online retailers from usurping its market share. We note that the company has a strong balance sheet with its debt to assets ratio of around 21%; hence it can take on further leverage if it wishes to make further investments. Although its cash flow from operations of $490 million is enough to cover its investment requirements of $350 million.

Why We Are Bullish About The Company’s Future

We forecast net sales to be around $12.1 billion in fiscal 2015. Over the long term, we expect sales to grow at a CAGR of 3%.We currently value Bed Bath and Beyond at $64 per share, implying a 45% upside to its market price.

We are confident about the initiatives the company is taking, especially the deployment of systems, equipment and increased bandwidth in stores, as well as continued investments in analytics and marketing which makes it easier for the company to develop a more comprehensive view of our customers and drive better customer engagement. Bed Bath & Beyond is also trying to integrate its in-store experience with advancements in is digital and online offerings in order to provide its customers with a seamless experience.

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