How Bed Bath And Beyond Can Bounce Back

July 3rd, 2017 by Trefis Team
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BBBY: Bed Bath & Beyond logo
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Bed Bath & Beyond
Bed Bath & Beyond‘s (NASDAQ:BBBY) stock tanked 12% after reporting weak fiscal first quarter earnings on June 22. The company’s stock is down 27% year to date, as it grapples with margin pressure and declining store traffic amid competition from e-commerce and omni-channel competitors.
In the first quarter, Bed Bath & Beyond’s revenue remained flat at $2.74 billion, primarily due to an increase of 2.1% in non-comparable sales including PMall, One Kings Lane and new stores, largely offset by a 2% decrease in comparable sales. This decline in comparable sales reflected a decrease in the number of transactions in stores, partially offset by an increase in the average transaction amount. Also, the company’s gross margins continued to face pressure in the first quarter, declining by around 90 basis points (bps) from 37.4% in Q1 2016 to 36.5% in Q1 2017. Bed Bath & Beyond identified an increase in net direct-to-customer shipping expenses as the primary reason behind this decline, which resulted from more promotional shipping activity, as the retailer’s free shipping threshold for this quarter was $29, compared to $49 for about half of the first quarter last year. In addition, a rise in coupon expenses also lowered the company’s gross margins, which in turn resulted from an increase in coupon redemption, partially offset by a decrease in the average coupon amount.
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Going forward, the company is focusing on cutting down on its promotional activities – as promotions put pressure on the margins – in order to reverse its negative trends. Here’s why we expect it to work.
Striking A Balance: Omni-Channel Retailing
Coupons have always been a part of Bed Bath & Beyond’s strategy, usually found in promotional mailers or magazines. The 20% discount coupon is a familiar one to the company’s customers. While these coupons were successful in getting customers to the stores for a long time, they have started to have an adverse affect on the company in recent quarters. Customers now increasingly expect the discount coupons, and many only shop at the company’s stores when they have the coupons. As a result, the company is thinking of ways to cut down on its promotional activities going forward.
Bed Bath & Beyond has started testing a new online loyalty program Beyond+, an invitation-only membership service that offers a 20% discount on all purchases as well as free shipping. With this program, the company is trying to connect its online channel with its vast network of stores, in order to leverage customers’ online interest and grow its store sales. The pilot launch of Beyond+ could help increase customer stickiness, eventually leading to the full program launch if the results are favorable. Moreover, this could lead to fewer coupons being dispatched.
Growth In Online Initiatives
Despite a strong business model, Bed Bath & Beyond is struggling with stagnant revenues and declining comparable sales growth, mainly because the company is still very much brick-and-mortar reliant. For that reason, management is increasing its efforts in online initiatives to offset the declining foot traffic. Although the company does not specifically report its online sales, we estimate from the 2016 annual report that website and mobile applications make up roughly around 11-13% of sales, up from about 10% in 2015. We can say this because the company’s overall comparable sales declined by 0.6% in 2016, while its sales through website and mobile applications were up 20% and comparable sales in stores were down by 2-4%. However, the company’s investment in digital initiatives have come later than many of its competitors, so it does have a lot of scope to grow further.
Have more questions about Bed Bath And Beyond? Please refer to our complete analysis for Bed Bath & Beyond