Bed, Bath & Beyond (NASDAQ: BBY) is a very interesting company because it has managed to survive and thrive in a drastically changing retail environment.
Basically, Bed, Bath & Beyond is an old fashioned category killer that is a discount store that makes its money by offering great prices on one kind of merchandise. What’s intriguing about Bed, Bath & Beyond is that it has managed to survive and even thrive while other category killers such as ToysRUs, Linens N’ Things and Circuit City have struggled or even collapsed.
Bed, Bath & Beyond is also an investor favorite; its stock was trading at $60.87 a share on November 3, 2015. Even though its size is modest, the company reported a TTM revenue of $12.01 billion on August 31, 2015, which makes the stock sound overpriced. Although its revenues have been growing, it reported a TTM revenue of $11.67 billion in August 2014, which bucks the trend at discount giants such as Walmart (NYSE: WMT), which actually saw its revenues fall in the third quarter of 2015.
Like other deep discounters, Bed, Bath & Beyond is characterized by low cash flows and high profit margins. It reported a net income of $906.6 million, a free cash flow of $166.86 million and a profit margin of 6.73% on August 31. The reason for this its business model; the chain sells relatively high-end household merchandise, mostly kitchen and bathroom accessories, at low prices.
Why Bed, Bath & Beyond Could Show Us Retail’s Future
It also relies heavily upon gimmicky promotions, including the famous 20% off coupon that seems to land in every mailbox in America on a regular basis. This can create a problem because it cuts directly into profits.
Bed, Bath & Beyond could also be a good gauge of the health of the U.S. retail industry because it is a traditional brick-and-mortar retailer that operates 1,520 stores. It is also very dependent upon traditional paper marketing tools such as newspaper supplements and coupon mailings. Therefore taking a close look at this chain can show us where retail is actually going.
To that end, I’ll perform a quick and dirty SWOT analysis of this chain. For those of you that did not go to business school, a SWOT, or Strengths, Weaknesses, Opportunities and Threats, analysis is a tool used to determine a company’s potential.
Bed, Bath & Beyond Quick and Dirty SWOT
- Loyal customer base. People like shopping at Bed, Bath & Beyond. Many consumers make it their first choice for home furnishings.
- Enjoyable shopping experience. People love to shop at Bed, Bath & Beyond because it is fun.
- Marketing ability. Bed, Bath & Beyond has a proven ability to easily reach customers and to master a wide variety of marketing tools and strategies, including digital ones.
- Proven ability to deep discount keeps it competitive with companies like Walmart, Target (NYSE: TGT) and Amazon (NASDAQ: AMZN)
- Ability to project an image of offering of a higher class of merchandise at a lower price
- Wide selection of merchandise
- Proven ability to adapt to changing retail environment
- Large footprint of brick-and-mortar stores, which leads to high operating costs. This includes locations in some declining areas, such as the Northeast.
- Heavy reliance on brick-and-mortar sales makes it vulnerable to online competitors.
- Limited online presence makes it difficult to compete with Amazon and other online discounters.
- Heavy reliance on old-fashioned marketing tactics such as paper coupons makes it hard to reach younger shoppers.
- Heavy use of coupons and other discounts, which can cut into profits. Even though Bed, Bath & Beyond’s revenue rose by 1.7% last year, its profits fell by 10%, largely because of coupon redemptions.
- Well-known brand name that has a strong reputation among customers. This could be a valuable asset in building business online.
- Large number of urban locations in a country that is increasingly urbanizing
- A reputation as a urban retailer that can attract younger customers, including hipsters
- Younger, urban-dwelling American millennials are increasingly strapped for cash and have a reputation for being cheap. As a deep discounter and an urban brand, Bed Bath & Beyond is well positioned to attract their business.
- Decline in business at traditional retailers, particularly Walmart, indicates changing shopping patterns that could benefit Bed, Bath & Beyond.
- Disappearance of historic competitors, including Linens N’ Things, and many Sears, Macy’s and JC Penney stores, leaves an opening for Bed, Bath & Beyond to exploit.
- Online retailers, particularly Amazon.com and Overstock.com, which are willing to engage in deep discounting of the same merchandise that Bed, Bath & Beyond sells
- Convenience of online shopping, particularly to urban residents that do not own cars or drive
- Free delivery offers from online retailers, which discourage customers from going to brick-and-mortar stores
- Entry of aggressive deep discounters, including Kroger (NYSE: KR), into the household goods arena. Kroger now sells kitchen and bath accessories in its Marketplace stores, and it offers delivery in some markets.
- Growth of dollar stores like Dollar Tree (NASDAQ: DLTR) and Dollar General (NYSE: DG), which sell some of the same products at a much lower price
- The aggressive expansion of Walmart Neighborhood Market, which offers household goods and other amenities such as groceries, financial services, gas and pharmacies in urban and suburban areas now served by Bed, Bath & Beyond
- Decline of traditional shopping centers as other stores close, which can lead to lower foot traffic
- Aggressive expansion of online operations at some large retailers, including Walmart and Target. This increases the variety of goods available online and drives down prices by providing more choices. These companies compete directly against Bed, Bath & Beyond and offer many of the same brands.
As you can see, Bed, Bath & Beyond faces a very tough environment that’s going to get more brutal in the years ahead. This chain’s struggle to survive could show us what the future of brick-and-mortar retail will be and how much of an impact online discounters will really have.
One thing is for certain: Investors would be well advised to stay away from Bed, Bath & Beyond’s stock right now. This company’s future is just too uncertain to make it a value investment.
Disclosure: The blogger owns shares of Kroger.