How Have Bed, Bath and Beyond’s Coupons Impacted Sales and Margins?

Bed Bath & Beyond (NASDAQ: BBBY) has had a relatively tough 2017, as its performance thus far has been mostly below its guidance and market expectations. In fact, the retailer’s stock is now trading almost 50% lower than its price at the beginning of the year, as it struggles with margin pressure and declining store traffic amid competition from e-commerce and omni-channel competitors. The company’s profits have also declined in recent quarters, in large part due to extensive coupon usage.

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. In addition, the retailer had a reputation for at times accepting multiple coupons per order, or accepting them beyond their expiration dates. In fact, many customers increasingly expect the discount coupons now and may only shop at the company’s stores when they have the coupons. While these coupons were successful in getting customers to stores for a long time, they have had an adverse effect on the company in recent quarters. As a result, Bed Bath & Beyond has been taking steps to cut down on these coupons to mitigate the pressure they put on its margins.

Launch of Beyond+

In the first six months of 2017, Bed Bath & Beyond’s revenues decreased marginally to $5.7 billion, due to a 2.4% decrease in comparable sales, which mostly declined due to a mid-single-digit percentage range decline in store sales, while the company’s digital channels grew by more than 20% year on year. Despite a strong business model,  the company is struggling with stagnant revenues and declining comparable sales growth, as it is still very much brick-and-mortar reliant. Consequently, this also means that the coupons may be losing their effectiveness as store foot traffic continues to fall. The retailer’s operating margin fell to 5.8%, down 360 basis points, in the most recent quarter. Both gross and net margins were further compressed as well, due to increases in net direct to customer shipping expense, coupon expense, payroll and payroll-related expense, and technology expenses. Additionally, the company is also grappling with fixed operating store costs while the store traffic continues to decline, leading to further margin pressure.

We expect the launch of Beyond+ to help increase customer stickiness, eventually leading to some revenue growth going forward, assuming the results are favorable. However, the margin pressure will likely continue in the near term due to increases in the overall expense structure for the accelerated spending associated with the company’s organizational changes and transformational initiatives, as well as the unfavorable impacts of Hurricanes Harvey and Irma.

Our $25 price estimate for Bed Bath & Beyond’s stock is more than 15% ahead of the current market price.

See our complete analysis for Bed Bath & Beyond