Key Factors Affecting Bed Bath & Beyond’s Margins

Bed Bath & Beyond (NASDAQ:BBBY) is one of the largest specialty retailers of home furnishings and bath and linen related items in the U.S. Its gross margins increased in 2010 reaching a high of 43.7% after hitting lows of 41.5% in 2008. It depends primarily on in-store purchases as online sales account for just 1.5% of total revenues, a metric that we believe can be improved, and competes with other specialty stores along certain product lines, such as Williams-Sonoma (kitchen ware) and Pier 1 Imports (Home Furnishings and Home Textiles), other department stores such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT) as well as online retailers such as Amazon (NASDAQ:AMZN).

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Factors Affecting Bed Bath & Beyond’s Margins

Sales Mix

• The sales mix is an important determinant of Bed Bath & Beyond’s gross margins. The higher proportion of generic home furnishing items such as furniture and lighting instead of more niche items exclusive to Bed Bath & Beyond (generally cotton and linen related items) in the sales has a negative impact on Bed Bath & Beyond’s margins.
• In the recent Q3 results, it posted a gross margin of approximately 40.9%, the same as the comparable period a year ago. The gross margin was, however, offset by the increase in inventory acquisition costs and a shift in the mix of merchandise sold to lower margin categories.

Input Costs

• Cotton is one of the most important commodities for Bed Bath & Beyond given the large offering of textile products. Cotton prices have remained very volatile in the past two years, ranging from the highs of $2.29 per pound in March 2011 to lows of $0.77 per pound in January 2010. Increases in the price of cotton and other commodities could negatively affect the margins of Bed Bath & Beyond as the company may have to absorb some of the price increases.
• Bed Bath & Beyond has a vast number of suppliers, many are substitutable. Bed Bath & Beyond purchases from over 5,500 different suppliers which gives it sufficient bargaining power to deal with various suppliers.

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