Bed Bath Feels the Sting from Online Stores

Improving economy and housing sector recovery remain positive drivers

Source: Company's Website
Source: Company’s Website

Bed Bath & Beyond Inc. (NASDAQ: BBBY), the New Jersey-based household merchandise retailer, announced its financial results for Q1 FY16 ended May 28th, 2016, on June 22nd, 2016. The Company sells domestics merchandise and home furnishings under the names Bed Bath & Beyond, Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, Harmon or Harmon Face Values, buybuy BABY and World Market, Cost Plus World Market or Cost Plus. With the recent acquisition of One Kings Lane on June 14th, 2016, Bed Bath offers a unique collection of home goods, designer, and vintage items. The Company also operates Linen Holdings, a provider of a variety of textile products, to institutional customers in the hospitality, cruise line, and healthcare industries. Additionally, the Company has a joint venture that operates retail stores in Mexico under the name Bed Bath & Beyond. Read more about the financial results of Bed Bath & Beyond below.

Q1 FY16 financial details

The retailer reported flat revenue growth of $2.74 billion during Q1 FY16 compared to estimates of $2.78 billion, thereby joining a host of U.S. brick-and-mortar retailers and departmental stores such as Macy’s Inc. (NYSE: M), Target Corp. (NYSE: TGT), and J.C. Penney Company Inc. (NYSE: JCP), in fending off intense competition from online merchants like Amazon.com Inc. (NASDAQ: AMZN) and fast-expanding dollar store chains.

Adding to its woes, comparable sales decreased by 0.5% in Q1 FY16, compared to a 2.2% increase in the same period last year. E-commerce has proved to be a laggard for Bed Bath, which was a late entrant to e-commerce and has recently been investing in upgrading its online presence, introducing mobile apps, and rolling out a new point-of-sale system. These efforts have borne results as witnessed during Q1 FY16 with comparable sales from customer-facing digital channels growing in excess of 20%. On the other hand, comparable sales from stores declined in the low single-digit percentage range, which is a cause for concern because online sales have lower margins. To overcome pressure on operating margins, the retailer is looking to achieve significant scale online while closing its physical stores.

Foreign headwinds as well as decreasing margins due to higher expenses weighed on earnings during the quarter under review. As a result, the Company reported a decline in net earnings to $122.6 million, or $.80 per diluted share, during Q1 FY16, compared with $158.5 million, or $0.93 per diluted share, for Q1 FY15, falling short of estimates of $0.86.

Physical stores face heat from online stores

B2Bed Bath’s brick-and-mortar stores are witnessing shrinking footprints with consumers increasingly turning to online shopping in a big way. On the brighter side, the rising consumer confidence, higher disposable income among the middle-class, and resurgence in the housing market are seen as positive trends that could auger well for the growth of the Company in the next few quarters.

Moreover, Bed Bath is expected to gain a competitive edge over other general mass merchandisers that offer lower quality products after its acquisition of One Kings Lane. Bed Bath mainly competes with discount department stores such as The Home Depot Inc. (NYSE: HD) and Wal-Mart Inc. (NYSE: WMT), which have a huge benefit in terms of economies of size and scope.

Recent acquisitions

Bed Bath acquired One Kings Lane Inc., a home décor and design specialist that offers a unique collection of home goods and vintage items, in an all-cash deal on June 14th, 2016. One Kings Lane works directly with home furnishings brands, vintage dealers, and designers. It also offers complimentary interior design services at its two design studios located in San Francisco and New York in the U.S.

Store updates

As of May 28th, 2016, Bed Bath had a total of 1,533 stores, including 1,021 Bed Bath & Beyond stores, 277 stores under the names of World Market, Cost Plus World Market or Cost Plus, 105 buybuy BABY stores, 79 stores under the names Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, and 51 stores under the names Harmon or Harmon Face Values. During Q1 FY16, the Company opened 1 Bed Bath & Beyond store, 1 andThat! store, 1 Cost Plus World Market store and 1 Harmon store, and closed 1 Harmon store.

Stock purchase

During Q1 FY16, Bed Bath repurchased approximately $178 million of its common stock, representing approximately 3.8 million shares, under its existing $2.5 billion share repurchase program. As of May 28th, 2016, the Company had a remaining share purchase authorization of $2.1 billion, which is expected to be completed in the latter half of FY19 or in FY20.

Guidance for FY16

Bed Bath expects EPS to come in at $4.50-$5.00 for FY16, compared to estimates of $4.98, based on current business trends and including the purchase of One Kings Lane.

Stock Performance

B3Bed Bath’s stock stood at $43.18 at the close on Wednesday, June 22nd, 2016, having reached an intraday high of $43.81 and a low of $43.00 during the session. The stock’s trading volume was at 3,613,152 for the day. The Company’s market cap was at $6.79 billion as of Wednesday’s close.

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