Bed Bath & Beyond Feels E-commerce Sting; Reports Lower Comparable Store Sales Growth

Improving economy and housing sector recovery remain positive drivers

shutterstock_146201519Bed Bath & Beyond (NASDAQ: BBBY), the New Jersey-based household merchandise retailer, reported an approximately 6% rise in net sales to $2.86 billion in the third quarter ended 30 November 2013 compared to $2.70 billion in the year-ago period. Net earnings grew by about 8.70% to $1.12 per diluted share ($237.2 million) in Q3 compared to net earnings of $1.03 per diluted share ($232.8 million) in the year-ago period. Analysts had predicted EPS of $1.15 on net sales of $2.88 billion for the quarter under review. Like all other traditional brick-and-mortar stores, Bed Bath is feeling the intense competition from online stores, which is reflected in the lower growth of 1.3% in its comparable store sales versus an increase of approximately 1.7% in the year-ago period.

Reacting to the earnings, Bed Bath & Beyond shares have fallen around 11.70% in the previous three trading sessions clearly underperforming the S&P 500, which has gained 0.24% during the same period.

Last week price movement as compared to S&P 500

Source: Bloomberg
Source: Bloomberg

Wide footprint

Following the acquisition of its smaller rival Cost Plus for $495 million and Linen Holdings in 2012, Bed Bath had a total of 1,491 stores, including 1,011 Bed Bath & Beyond stores in all 50 states as of November 30, 2013. During Q3, the company opened five Bed Bath & Beyond stores, two stores under a combination of the names Christmas Tree Shops or andThat!, and three World Market stores. It also closed down three Bed Bath & Beyond stores. Consolidated store space as of November 30, 2013, was approximately 42.5 million square feet. Moreover, the company also operates four stores in the Mexico City market under the name Bed Bath & Beyond as part of a joint venture. This is a formidable store presence which very few rivals can compete with, given that Bed Bath is a popular brand among the lower end of the market.

Lower guidance for fourth quarter

Looking ahead, management guidance for fourth-quarter earnings were between $1.60 and $1.67 per share. This is much lower than the earlier guidance of $1.70-1.77 per share. What is more disappointing for investors are the full-year 2013 guidance of $4.79-4.86 per share, as compared to the earlier level of $4.88-5.01 per share.

Historical revenue and EPS trends

Source: Bloomberg
Source: Bloomberg

Why the downtrend?

Bed Bath & Beyond Inc., together with its subsidiaries, operates a chain of retail stores that sell a range of domestic merchandise, such as bed linens and related items, bath items, and kitchen textiles; and home furnishings. The company also offers giftware and household items, and health and beauty care items. Given that all companies operating physical stores will continue to face the sting from online stores going forward, the rising consumer confidence, higher disposable income among the middle class, and a resurgence being witnessed 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, the home furnishing industry is expected to hugely benefit from consumers seeking high-quality products. This will pave the way for Bed Bath to gain a competitive edge over other general mass merchandisers that offer lower quality products. As per the recent industry trends, Bed Bath is also expected to face the heat from discount department stores such as Target (NYSE: TGT), The Home Depot (NYSE: HD), and Wal-Mart (NYSE: WMT), which have a huge benefit in terms of economies of size and scope. The huge size of these industry players often give them significant buying power to enter into exclusive product purchase agreements with manufacturers at lower cost. Hence, they can pass on these cost savings to consumers in the form of discounted prices. However, what is crucial is the quality of products, which is vital to build up brand loyalty over the years. It remains to be seen whether the positive market sentiments will translate into better sales for Bed Bath in the next quarter.

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