Bed Bath & Beyond (BBBY)

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See all Bulls Reasons Bulls: Reasons To Buy Strong financial framework with very little debt allows BBBY to hold out against failing competitors 0% agree Strong financial framework with very little debt allows BBBY to hold out against failing competitors BBBY has one of the strongest financial underpinnings in the retail world, let alone the home furnishings market. Bed, Bath, and Beyond has almost doubled their store base without taking out a penny of debt over the last 5 years. Free cash flow has historically been... read more View or Edit Reason 0 votes 0% agree PE is low compared to historical levels 0% agree PE is low compared to historical levels Bed, Bath, and Beyond has traded at a P/E multiple in the mid-20s historically. Today it’s at 13. The problems are not company specific. The historic housing slump and credit crunch hit the company directly in its gut. View or Edit Reason 0 votes 0% agree Room to grow the number of stores 0% agree Room to grow the number of stores The company estimates that the U.S. can support 1,300 stores. From the current count of 860, that’s still a 34% potential increase in stores. The company also recently opened its first and only Canadian store, an untapped market. And last, its smaller concepts have... read more View or Edit Reason 1 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Economic downturn has largely reduced customer demand for home furnishing products 0% agree Economic downturn has largely reduced customer demand for home furnishing products The current recession has reduced consumers' demand for home furnishing products. In fact, sales figures from the home furnishing industry fell 13.5% in October 2008, and sales are expected to fall even through the 2008-2009 Christmas season. BBBY is expected to post... read more View or Edit Reason 0 votes 0% agree Questionable management decisions 0% agree Questionable management decisions BBBY's acquisition of buybuy BABY for $67 million and the repayment of $19 million in debt from one of its co-founder's sons has investors wondering what the true motives for the acquisition were. View or Edit Reason 0 votes 0% agree Growth in subsidiaries unclear 0% agree Growth in subsidiaries unclear Although BBBY has the experience to grow its subsidiaries and has talk of an expansion plan, it is unclear when that growth will occur. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Since the furniture and home decor markets are so competitive, any company could overtake the market at any time. While increased square footage and the acquisition of new companies in different markets have brought BBBY steadily increasing sales, BBBY must fight to keep its industry lead and high sales.

[edit] Company Overview

Founded in 1971, Bed Bath & Beyond Incorporated (BBBY) has been continuously growing. Its recent acquisitions of Christmas Tree Shops (CTS), Harmon Discount Stores and buybuy Baby mark its intention to enter different markets and broaden its consumer base. As of May 31st, 2008, BBBY consolidated square footage of store stands at about 30.4 million.^[3]

• Bed Bath & Beyond (BBB): With a total of 890 stores, the Bed Bath and Beyond retail chain is the leader in the decorative home furnishings sector (and its store size--ranging from 20,000 to 50,000 square feet--make it the largest domestic superstore chain). BBB offers a wide range of name brand home furnishings and domestics merchandise for lower prices and better service than department store competitors. For the past 3 years, domestics merchandise has accounted for about half of total sales; linens make up about 15% of that half.

• Christmas Tree Shops (CTS): BBBY operates 41 Christmas Tree Shops in ten states, concentrated in the northeast. CTS was acquired in June of 2003 and now represents about 5% of BBBY's total square footage. CTS's name can be misleading; although CTS does sell seasonal gifts, it also carries a wide variety 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 Discount Stores: Acquired by BBBY in early 2003, the health and beauty care product chain has been slowly growing at a rate of 3-7 new stores per year. In 2006, Harmon represented 1% of BBBY's total square footage, and currently BBBY operates 40 Harmon stores in 3 states.

• 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 ten BABY stores in four East Coast states. 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).

[edit] Potential Chain Expansion

BBBY's new acquisitions have a great deal of growth potential, and the company has a lot of experience with expansion--from 1992 to 2006, Bed Bath and Beyond retail stores grew in number from 34 to 831 stores. CTS, Harmon, and buybuy BABY are small chains, but with BBBY's experience, the chains have the potential to flourish in their respective markets. Still, although BBBY has begun slowly expanding CTS and Harmon stores, it is not clear when they will take off.

[edit] Store-within-a-store

In addition to opening new independent stores, BBBY has also begun to insert 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. Since BBBY began to incorporate this "store-within-a-store" concept, same store sales have increased by about 5%.

[edit] buybuy BABY

BBBY's most recent acquisition deserves a special spotlight because of its huge potential for growth. BABY taps into a different market than do BBB, Harmon, and CTS: the U.S. infant and toddler retail market, worth approximately $39 billion. 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; the company is banking on an important "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 $39 billion infant and toddler market with little success, such as Williams-Sonoma (WSM) with Pottery Barn Kids, Pier 1 Imports (PIR) with Pier 1 Kids, and Babies 'R Us. BBBY seems to be keeping up with competitors Williams-Sonoma and Pier 1 Imports by also entering into the baby market, where BABY will have to face entrenched competition. Still, there do remain key differences between BABY and the competition: since BABY stores are extremely large, more square footage could lead to more sales because of BABY's ability to carry a wide variety of merchandise and lots of inventory--just like its sister chain BBB.

[edit] Law of Large Numbers

As a company grows, it becomes more and more difficult to sustain a given percentage growth because the fixed percentage represents a larger and larger dollar amount. BBBY plans to defy the law of large numbers, projecting an increase in earnings per share (EPS) of 20% over the next two to three years. (EPS is the total earnings divided by the number of shares issued to the public (shares outstanding)). This is a huge feat for a company that of over $6.5 billion in annual sales.

BBBY plans to increase EPS by issuing a share repurchase plan. Many companies issue a share repurchase plan when they feel that their stock is underpriced. This means that BBBY will use its cash to buy back shares from stockholders, instead of opening a lot of new stores. The share repurchase plan will raise EPS by decreasing the amount of shares in public hands. Since EPS is the total earnings divided by the number of shares issued to the public, fewer shares in public hands will raise that number. After the stock price has risen to an amount that BBBY feels is fairly priced, they will put the stock back on the market. The stock repurchase plan favorable to BBBY because they will be selling the stock back to shareholders for more than they bought it for.

[edit] Cannibalization

BBBY has been focusing on expanding BBB since 1992, but with 888 stores throughout the U.S., BBB's growth could be winding down in the near future. 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, or when one company's stores steal traffic away from another one of their 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.

However, the company estimates that it can open 1300 stores in the U.S. market, which is a potential 34% increase from its present scenario. The company also recently opened its first and only Canadian store, an untapped market. And last, its smaller concepts have minuscule reach and can likely be expanded to several multiples of their current store count.

[edit] New Stores, Comps and Clearance Sales

New stores almost always have higher sales than comps. Comps, also known as comparable stores, are stores that have been open for more than a year. Comps are important because they indicate how much sales growth was due to already existing stores and how much was due to new stores. New stores already take sales away from old ones, and cannibalization will only make it worse. BBBY is constantly opening new stores throughout the U.S. If new stores take away sales from comps, increasing square footage by opening new stores will not lead to more sales like BBBY has experienced in the past.

In many cases, stores will hold clearance sales to help boost comps sales. Clearance sales are beneficial for customers because they have the opportunity to purchase merchandise for cheaper than the retail value. When BBBY has a clearance sale, comps in that quarter will be raised, but not significantly. Clearance sales may not be worth the loss in potential sales due to slashed prices just to raise comps for a specific quarter.

[edit] Housing Market and Economic Health

Like any other company in the retail market, BBBY will be affected by overall economic health. Economic concepts such as interest rates and the housing market will affect consumer spending, which will affect BBBY's sales. The housing market and consumer spending habits often reflect consumer confidence in the economy. The housing market will be particularly important to furniture and home decor retailers, such as BBB.

The housing market would affect BBB by increasing or decreasing the amount of disposable income, or the amount of income left after taxes. For example, high interest rates coupled with expensive housing will negatively affect consumer spending and the retail market would experience a dip in sales. The home decor and furniture markets would be harder hit than others because if its consumers aren't buying homes, there would be no immediate need for home decor merchandise or new furniture. On the other hand, lower interest rates and cheap housing would boost consumer spending because people would have more disposable income. Because consumers would not be spending their left over income on high interest rates or inflated housing prices, the home decor and furniture markets would boom due to the increased need for home decor and furniture products. Even if the economy is in favor of BBBY's products, it faces the challenge of choosing products that its customers will like.

[edit] Consumer Fashion Trends

The competition is fierce in the home decor and furniture markets. In order to keep its majority of the market, BBBY must continue to correctly predict future consumer fashion trends. Since BBBY carries such a wide range of merchandise, from seasonal gifts to baby products to linens to cosmetics, it is less in jeopardy from a mistake than its competitors who only carry furniture or have just a small selection of merchandise.

[edit] Bed Bath and Beyond versus the 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. BBBY is the clear leader with 5% of the market. 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.

Cost Plus (CPWM) Tuesday Morning (TUES)

• * Data from 2003
• Chart 2. Source: Company reports and data

 Bed Bath & Beyond

	Select All  |  Select None Metrics Revenue by Geography - International Revenue by Geography - US Revenue by Direct Marketing Cost of Goods Sold Store Operating Expenses Sales Growth Number of Stores Square Footage Inventory per store Inventory per square foot Selling, General and Administrative expenses Cost of Goods Sold (COGS) Revenue Net Income Same Store Sales Growth Sales per Store Sales per Square Foot Inventory Turnover Cancel

	Select All  |  Select None Companies Bed Bath & Beyond (BBBY) Design Within Reach (DWRI) Haverty Furniture Companies (HVT) Jennifer Convertibles (JEN) Kirkland's (KIRK) Pier 1 Imports (PIR) Restoration Hardware (RSTO) Williams-Sonoma (WSM) Cancel

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Company	Data From	Net Income	Sales per Square Foot	Cost of Goods Sold (COGS)	Same Store Sales Growth	Inventory Turnover	Revenue	Sales per Store
Bed Bath & Beyond (BBBY)	2008	$563M[4]	$234[4]	$4.12B[5]	1%[4]	Add	$7.05B[4]	$7.26M[4]
Haverty Furniture Companies (HVT)	2007	$1.76M[6]	$181[7]	$395M[6]	(10.6%)[8]	Add	$785M[7]	$6.38M[7]
Pier 1 Imports (PIR)	2008	($96M)[9]	$164[10]	$1.07B[11]	(1.7%)[10]	Add	$1.51B[9]	$1.35M[12]
Williams-Sonoma (WSM)	2008	$196M[13]	$638[14]	$2.41B[15]	0.3%[13]	Add	$3.94B[13]	$3.8M[14]

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See all Home Furnishing Industry WikiData

[edit] References

1. ↑ BBBY 1Q FY 2008 10-K Quarterly Report
2. ↑ BBBY 1Q FY 2008 Earning Call
3. ↑ BBBY 1Q FY 2008 Earnings Call
4. ↑ ^{4.0 4.1 4.2 4.3 4.4} BBBY, 2008 10-K, Item 6 PG 13
5. ↑ BBBY, 2008 10-K, Item 8 PG 27
6. ↑ ^{6.0 6.1} HVT, 2007 10-K, Item 15 PG F-3
7. ↑ ^{7.0 7.1 7.2} HVT, 2007 10-K, Item 6 PG 15
8. ↑ HVT, 2007 10-K, Item 7 PG 19
9. ↑ ^{9.0 9.1} PIR, 2008 10-K, Item 6 PG 16
10. ↑ ^{10.0 10.1} PIR, 2008 10-K, Item 7 PG 18
11. ↑ PIR, 2008 10-K, Item 8 PG 33
12. ↑ PIR, 2008 10-K, Item 6,7 PG 16,19
13. ↑ ^{13.0 13.1 13.2} WSM, 2008 10-K, Item 6 PG 20
14. ↑ ^{14.0 14.1} WSM, 2008 10-K, Item 7,6 PG 23,20
15. ↑ WSM, 2008 10-K, Item 7 PG 25