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BBBY AT A GLANCE

P/E ► 21.4 AVG EV/EBITDA ► 11.8 AVG ROA ► 10.2% AVG ROE ► 15% AVG Debt to Equity ► 0.452 LOW Current Ratio ► 2.74 AVG

 

 

 

 

 

 

Bed Bath & Beyond Incorporated (NYSE: BBBY) is the leading U.S. decorative home furnishing and domestic merchandise company with $7.2 billion in net sales in 2008. ^[1] The company is most known for its flagship chain Bed Bath & Beyond (BBB), a store that sells everything from the stated bedroom and bathroom furnishings to cookware and home decor. However, since 2002, the company has expanded its product line and business by acquiring three subsidiaries: Christmas Tree Shops (giftware and household items retailer), Harmon Stores (health and beauty care retailer), and buybuy BABY (infant and toddler merchandise retailer). ^[2] In 1992, the company engaged in an aggressive Expansion Program and since then has increased its total number of stores from 34 to 1,037 which operate in 49 states, Puerto Rico, and Canada. ^[3]

Since the beginning of the U.S. recession, retailers have suffered from declining consumer spending on non-necessities, and BBBY has been no exception.^[4] In FY2008, the company's same store sales decreased by 2.4% and net income fell by 24.5%. However, due to the increased market share due to the bankruptcy of former competitor Linens n' Things, the company was still able to increase its net sales by 2.3%. ^[1] The changing competitive landscape is now forcing the company to face discount retailers, such as Wal-Mart (WMT), which have attracted consumers looking to save money.

Company Overview

Founded in 1971, BBBY has grown from a two store operation that just sold bed linens and bathroom accessories to a supply chain giant with over 1,000 stores all over the United States.

Supply Chain Stores

• Bed Bath & Beyond (BBB): With a total of 930 stores,^[5] the Bed Bath and Beyond retail chain is the leader in the decorative home furnishings sector in the United States. BBB sells many different categories of products including: bedroom and bathroom furnishings, cookware, home decor, furniture, lighting, and cleaning products. The chain offers many name brand home furnishings and domestics merchandise for lower prices and better service than department store competitors because they obtain these products in bulk. Since 2006, domestics merchandise has accounted for nearly half of the chain's total sales; linens make up about 14% of that half. ^[6]

• Christmas Tree Shops (CTS): BBBY operates 52 Christmas Tree Shops in 13 states,^[5] most of which are concentrated in the northeast. CTS was acquired in June of 2003 for $200 million. ^[7] CTS's name can be misleading-- although CTS does sell seasonal gifts, it also carries a lot of other merchandise including furniture, wall decor, gardening tools, and consumable products (especially gourmet items like teas, spices, pastas, and coffees). It directly complements the BBB chain by carrying many similar types of merchandise at a lower quality and price.

• Harmon Stores: Harmon Stores sells health and beauty products, vitamins, household goods, and skin care products. BBBY operates 40 stores in New York, New Jersey, and Connecticut. ^[5] The health and beauty care product chain was acquired by BBBY in 2002 and at the time operated 27 stores with 178,000 square feet of retail space and earned an estimated $30 to $45 million each year.^[8][9] Initially chain expanded at average rate of 4 to 7 stores per year, but since 2006, the chain has only expanded by one store each year.

• buybuy BABY: buybuy BABY is a retail chain that carries infant and toddler merchandise (strollers, clothing, nursery furniture). buybuy BABY's stores are very large and range from 28,000 to 60,000 square feet. BBBY acquired buybuy BABY in March of 2007 and now operates 15 BABY stores in eight states.^[5] BABY was founded by the sons of BBBY's co-chairman Leonard Feinstein, and many investors have questioned the motives behind the US $67 million buyout and the agreement to inherit BABY's US $19 million debt. Because the father and sons owned the majority of BABY's stock shares, they are essentially freed from the debt (and take home a big chunk of the $67 million).^[10][11]

Business Segments

BBBY groups all of its sales into one business segment. The company does not release this information to the public.

1992 Expansion Program^[3]

In 1992, the company engaged itself into a large expansion program. At the time, BBBY operated 34 stores with 0.9 million square feet of retail space. At the end of FY2008, the company operated 1,037 stores with 32.1 million square feet of retail space. All of the company's expansion was in the United States until 2007 when the company opened its first Bed Bath and Beyond store in Canada. In 2008, the company built three more stores in Canada. BBBY is also involved in a joint venture in Mexico in which they operate two stores under the name Home & More.

Since 2002, as part of the Expansion Program, BBBY has expanded its product line by acquiring CTS, Harmon Stores, and buybuy BABY, all of which have been a major part of the company's growth-- these chains represent nearly 10% of the company's total number of stores.

In 2008, the company opened 67 new stores, 49 of which were BBB stores, 11 CTS stores, 1 Harmon Store, and 6 BABY stores. In 2009, the company only plans to open 50 to 54 new stores, as a result of the slowing U.S. economy, of which 35 are BBB stores, 8 CTS stores, 8 BABY stores, and 1 Harmon Store.^[12]

A majority of BBBY's stores are located in California, Florida, Texas, New York, and New Jersey^[5]

Business Growth

FY2008 (ended February 28, 2009)^[1]

• BBBY reported net income of $425 million during 2008, which is was a 24.5% decline from its $563 million in earnings from FY2007. BBBY attributes the decrease in net income to inventory pile-up, as the weak retail and home market and general economic slowdown negatively impacted consumer demand and sales.^[13]

• Net sales were $7.2 billion in 2008, up 2.3% from net sales of $7.0 billion in 2007. In a challenging recessionary environment, BBBY sales were hurt as its target consumer market of middle-to-upper-class shoppers switched to discounted retailers to cut down discretionary spending on household goods. However, the company's sales benefited from the closing of BBBY's largest niche-market competitor, Linens 'N Things, which increased BBBY's market share even though consumer demand for its merchandise fell. ^[14]

• Comparable store sales decreased by 2.4% during 2008, compared to a 1.0% increase in 2007 and 4.9% increase in 2006.

• Operating margin was 9.3% of total revenues for the year with operating income at $674 million. This was a 254 bps decrease from FY2007, during which operating income was $838 million, or 11.9% of net sales.

Q2 2009 (ended August 29, 2009)^[15]

• BBBY's net income increased 13.6% year-over-year, from $119 million in Q2 2008 to $135 million in Q2 2009 despite recessionary pressures from the economics downturn in 2008.

• Net sales was $1.9 billion in Q2 2009, up 3.3% from net sales of the prior-year quarter.

• Comparable store sales decreased by 0.6% during Q2 2009.

• Operating profit for Q2 2009 was $222 million, and operating margin was 11.6% of net sales. This is a 150 bps increase from Q2 2008, during which operating profit was $187 million, or 10.1% of net sales.

• During Q2 2009, the company opened 9 new stores including 4 in Canada

Trends and Forces

BBBY Faces Changing Competitive Landscape after the Bankrupty of Rival Linens 'N Things

Facing a weak retail and real estate market, BBBY continues to struggle with lowered consumer demand for home goods and falling home prices. The core products of BBBY, home decor and household items, are some of the worst-hit segments because of their dependence on the home market and consumers cutting budgets for discretionary items to opt for necessities.^[16] Adding to recessionary pressures is the challenge of a changing competitive landscape after BBBY's strongest niche-market competitor Linens 'N Things declared bankruptcy in May 2008.^[17] Instead of competing with a specialty household good store like Linens 'N Things for the same middle-class quality-conscious consumer demographic, BBBY now faces strong competition from discount retailers such as Wal-mart (WMT) and Big Lots (BIG). These discount stores have become more appealing in the weak retail climate, attracting consumers on a reduced budget to trade down for less expensive product offerings.^[16] As a result, BBBY's 2008 net income dropped 24.5%.^[1]

Potential for Growth in the Infant and Toddler Retail Market

BBBY's acquisition of buybuy BABY taps into a different market than do BBB, Harmon, and CTS: the U.S. infant and toddler retail market. If BBBY can use its experience and resources to expand BABY, the company could take home a large chunk of this market. BABY stores already have merchandising and product presentation strategies similar to that of BBB and the company can also use the "shopping synergy" from young mothers drawn to BBB to bring more customers to BABY, and vice versa.

But BABY's success isn't guaranteed--there have already been a number of other companies who have tried to tap the infant and toddler market with little success-- [[Williams-Sonoma (WSM)|Pottery Bran Kids had -17.8% comparable store sales in 2008^[18] and all Pier 1 Kids stores were closed by the parent company Pier 1.^[19] Still, there do remain many other competitors in the market. The advantage that BABY stores have over competitors is that since BABY stores are large-- more square footage could lead to more sales because of BABY's ability to carry more merchandise and hold a lot of inventory just like its sister chain BBB.

Despite Slumping Economy, Consumers Still Spending on Discretionary Items

Like any other company in the retail market, BBBY's net earnings have been negatively affected by overall economic health of the United States. The economic recession has caused consumers to pinch their wallets and save more. However, despite the fact that the company's net earnings fell by 24.5% and same store sales decreased by 2.4% in FY2008, the company's net sales actually rose by 2.3%.^[1] This means that even though the economy is in a recession, consumers are still spending money on discretionary items such as home decor and furniture, which is a positive sign for BBBY. ^[13]

Too Many Stores Means that Cannibalization Hurts Comparable Store Sales

BBBY has been focusing on expanding BBB since 1992, but with 930 stores throughout the U.S., BBB's growth could slow. Because of the large number of BBBs nationwide, BBBY must carefully choose new locations for their superstores. BBBs too close to one another, or in the same markets, could steal sales away from already existing BBBs. This effect is known as cannibalization-- when one company's stores steal traffic away from another one of its stores. If cannibalization occurs, new stores will just provide a new location for customers to shop rather than ultimately increasing sales. Cannibalization will also decrease the amount of foot traffic in stores, which will also adversely affect sales. Signs of a slowdown are occuring as the company opened 49 new BBB stores in 2008 and only plans to open 35 stores in 2009.^[5] However, in order to avoid the cannibalization problem, the company is also expanding internationally by opening it's first store in Canada in 2007 and three more stores in 2008.

Store-within-a-Store Saves Money and Increases Foot Traffic

In addition to opening new independent stores, BBBY has also inserted some CTS and Harmon stores within already existing BBBs. Using an already existing BBB store instead of leasing a new building saves money on rent, encourages maximization of extra space, and also increases foot traffic within the BBB stores. The synergies between BBB and CTS/Harmon mean that each store can make up for the product offering shortcomings of its fellows. ^[20] Since BBBY began to incorporate this "store-within-a-store" concept in 2004, same store sales increased by nearly 5% each year until 2007 (after which same store sales decreased due to the struggling economy).^[1]

Competition

The home decor market is extremely diversified because of the large number of smaller stores, as well as the presence of large retail chains. Since the market is so diluted, the top four home decor retailers only account for 12.5% of the entire market.

BBB captures customers who want good quality at good prices. BBB's competitors are on either end of the market, selling higher and lower quality merchandise. Williams-Sonoma boasts higher quality products than BBB. Many furniture and home decor consumers view those products as an investor for their home, but higher quality comes at a higher price. Williams-Sonoma makes almost $200 more per square foot than BBB. This means that BBB must sell almost two times as much merchandise to turn the same dollar amount of sales as Williams. This is where BBB's large store space comes in. BBB has about 1.5% more square footage and almost double the sales of its closest competitor Williams-Sonoma (WSM). BBB has a clear advantage because of the huge amount of square footage. With stores averaging between 20,000 and 50,000 square feet, the giant stores allow BBB to carry a large, diverse assortment of merchandise in order to attract its broad consumer base. On the other end of the market, Linens-n-Things markets to customers who seek lower prices and sell the same type of products as BBB. Pier 1 sells to similar customers, but is geared more towards the furniture market than the home decor market.

Just like most retail stores, Wal-Mart Stores (WMT) is a competitor. Although, Wal*Mart's Impact may not be as considerable as other retail markets due to BBBY's, and the furniture and home decor markets, in general. Consumers seem to be shifting away from generic superstores like Wal-Mart and edging more toward stores that specialize in certain products. This could be due to the mentality that specialty stores will have higher quality merchandise. Decline of generic superstores are a good sign for specialized retail stores like BBBY.

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7} BBBY 2008 10-K, pg. 14
2. ↑ BBBY 2008 10-K, pg. 3
3. ↑ ^{3.0 3.1} BBBY 2008 10-K, pg. 5
4. ↑ Wall Street Journal "NBER Makes It Official: Recession Started in December 2007" 1 Dec 2008
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5} BBBY 2008 10-K, pg. 9
6. ↑ BBBY 2008 10-K, pg. 17
7. ↑ Business Net "Bed Bath & Beyond acquires specialty 'Christmas' chain - Christmas Tree Shops Inc" 7 July 2003
8. ↑ Business Net "Bed Bath & Beyond buys 27-unit Harmon chain" 25 March 2002
9. ↑ "Bed Bath & Beyond Acquires Harmon Stores" 8 March 2002
10. ↑ "Bed Bath & Beyond Buys buybuyBABY.(Company overview)" March 2007
11. ↑ Reuters "Bed Bath & Beyond buys buybuy Baby for $67 mln" 22 March 2007
12. ↑ BBBY 2008 10-K, pg. 16
13. ↑ ^{13.0 13.1} Time "Bed Bath & Beyond: An Economic Indicator?" 1 July 2009
14. ↑ Reuters "UPDATE 1-Linens 'n Things store closings to begin Friday" 15 Oct 2008
15. ↑ ^{15.0 15.1} BBBY Q2 2009 Report, pg. 4 and 13
16. ↑ ^{16.0 16.1} RTT News "Bed Bath & Beyond Q4 Still Clouded By Housing Overhang" 7 April 2009
17. ↑ WSJ Blogs "By the Numbers: Linens ‘n Things’ Bankruptcy Filing" 2 May 2008
18. ↑ WSM 2008 10-K, pg. 28
19. ↑ PIR 2008 10-K, pg. 26
20. ↑ Business Net "Bed Bath & Beyond tests health and beauty" 21 June 2004
21. ↑ WSM 2008 10-K, pg. 23
22. ↑ PIR 2009 10-K, pg. 18 and 22