Sunday, April 21, 2013

What You Need to Know About Bed Bath & Beyond

Investing in stocks is a bit like a visit to an auction. Some people enjoy paying a premium for what is in fashion so they can sell it on to someone more excitable than themselves, others enjoy buying a quality item at a reasonable price, and there are those that enjoy buying anything because it’s cheap.

And then there are those who kind of think something is fashionable, the item is cheap, and they can overlook some flaws in the product while hoping that others will do too. This article is about the last group and why they might love a stock like Bed Bath & Beyond $BBY.

Bed Bath & Beyond ticks some boxes

Yes, it is a housing-related play and yes, on a forward PE of 12, the stock is cheap. On the other hand, this company has exhibited rather less than stellar performance over the last year, as margins have fallen while comparable same-store growth is in low single digits at best.

Only last quarter, the company was forecasting same-store sales growth to be in the 2%-4% range, but they came in at 2.5% for Q4. Moreover, it is relying on growth from a couple of acquisitions which have actually reduced margins. My sense is that there are better stocks in the ‘housing franchise’, but as one of those people above who only want to buy quality, this isn’t the sort of stock I can fall in love with anyway.

Whether you buy value or growth, I think it’s fair to say that the prospects of this company depend more over its execution than a continuation of its immediate past. The company has been subject to increasing competition in the sector, and is seen as the primary loser due to Amazon.com's $AMZN move into the home goods space.

Not only does Amazon retail home goods through its core sites, but it also owns the parent company of casa.com, and the latter appears to be taking direct aim at Bed Bath & Beyond’s market. Amazon has the scale to be able to hurt its rivals.

Here is a look at Bed Bath & Beyond’s margins and possibly at how Amazon has effected it.




I’ve included a bar chart of the year on year movement in operating margins in order to better illustrate the situation. It doesn’t make pretty reading, and there is a sense that the company needed to make the World Market and Linen Holdings acquisitions in order to deal with encroaching competition.

The industry fights back

The threat from Amazon has certainly spurred the incumbent players to respond. And frankly, not an earnings report goes by without one of them announcing a step up in capital expenditures in order to expand e-commerce offerings.

For example, Pier 1 Imports $PIR recently announced that it would be rolling out a point of sales (POS) system and fully integrate it with its e-commerce facility.  Pier 1’s plan is to continue to offer in-store pick up for its online customers, while trying to differentiate its offering from the competition.Will it continue to do this successfully in the future and/or does it run the risk of cannibalizing its retail sales? That remains to be seen.

Similarly Williams-Sonoma $WSM has a three pronged strategy of expanding its e-commerce facility, international expansion, and rolling out new stores in its growth brands. Again, it is trying to achieve a certain amount of differentiation with its offerings and experimenting with its new stores.

I think that it will do well with its teens and baby furnishings because this is more of a ‘conceptual sell’. In other words, shoppers will appreciate going to the store in order to feel the impact of its furnishings. Furthermore, its range is somewhat more high-end than Bed Bath & Beyond, and relatively less susceptible to Amazon’s onslaught.

Where next for Bed Bath & Beyond?

In common with the industry, it is moving to a multi-channel offering and is launching some new websites this year, while aiming to generate margins in order to try and turn around performance. Thus far, the acquisitions have eaten into margins (at a time when some of existing stores were reporting poor performance), and the plan to improve prospects will see a ramp up in capital expenditures to $350 million next year from $315 million this year.  

Much of the capex is dedicated to store refurbishments and integrating the World Market and Linen Holdings acquisitions. In addition, the shift to lower margin products in the sales mix as well as increases in coupon redemptions will continue to pressure margins going forward. It's tough out there.

Putting all these things together means that an investment in the company depends upon a certain level of confidence in its plans to turn things around in 2013. Its not the kind of situation I enjoy investing in, so I will take a pass. It’s also not the sort of company you buy as a pure play on housing, but you might if you are hunting for a bargain than could suit your purpose. You just have to expect that it will come (as do all value plays) with some faults.