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Robert Stephens, CFA
Robert Stephens, CFA
Articles (93) 

Why Bed Bath & Beyond Has Turnaround Potential

The company’s refreshed strategy could boost its financial prospects

January 11, 2019 | About:

Bed Bath & Beyond Inc.'s (NASDAQ:BBBY) investments in its stores and online presence could boost its stock performance. The retail company is aiming to improve the customer experience, while reducing inventory levels through optimizing floor space. An improved digital offering could also enhance customer satisfaction levels, while providing greater flexibility for the company to add new products and features.

The elimination of less profitable products could improve the company’s margins. Dynamic online pricing may help to improve its competitive advantage. Although sales growth is suffering in the short term from the changes being implemented, the company’s focus on margins could lead to improved profitability. Having fallen 31% in the last year versus a 6% decline for the S&P 500, the stock could have recovery potential.

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Investment

Bed Bath & Beyond’s investments in its digital capabilities could boost its financial outlook. It is in the process of refreshing its digital commerce platforms in the U.S. and Canada by adding new service-based architecture, which will allow it to change and deploy new sections within its web channels more quickly and efficiently. The aim of this is to improve the customer experience through faster page load times as well as a clearer design that will improve the ease of navigation.

The retailer has also identified 40 stores that will be transformed to test its next-generation store initiative. As part of this process, the stores will incorporate a range of visual merchandising features that are aimed at improving the in-store experience for customers by creating a more inspirational environment. The changes are also designed to optimize the floor space in order to reduce inventory. So far, the test stores have recorded an inventory reduction in excess of 10%, which is better than inventory reductions achieved by the rest of the chain. Updates made to the appearance of the stores have contributed to sales growth, which is increasing at a mid-single-digit rate.

Strategy

The retailer is seeking to refresh its product lineup. It is eliminating products that are less profitable, while seeking to shift its decorative furnishing offerings to more proprietary products. To facilitate this, it is launching six in-house decorative furnishing brands by 2020. Each new brand will have an independent aesthetic that will build upon existing and established private label brands. This will help Bed Bath & Beyond improve its product differentiation and margins, while providing customers with more innovative and desirable products.

Bed Bath & Beyond is seeking to improve its competitive advantage through the use of dynamic online pricing and limited merchandise in select stores. This will be done on a local level, with the goal of tackliing showrooming and online competitors like Amazon (NASDAQ:AMZN). Changes to its membership program are expected to create a greater sense of customer loyalty, which could provide greater pricing power and higher margins in the future.

Transition

In the most recent quarter, Bed Bath & Beyond’s comparable sales declined 1.8% due to a mid-single-digit decrease in sales from the company’s stores, with a reduced number of transactions being recorded. This offset strong sales growth in its customer-facing digital channels. For the full fiscal year, the recent trend is expected to continue with a comparable sales decline of 1%.

Sales are being negatively impacted in the short term by strategy changes. The elimination of less profitable products took place shortly before the holidays, which led to a temporary loss in its search results ranking. The company is also prioritizing profitability over short-term sales growth. For instance, it raised its free shipping threshold for orders in the most recent quarter to $39 from $29. A lower budget for paid search advertising has also been made available, while fewer resources are being devoted to marketing activities as the retailer seeks to lower costs and improve margins.

Outlook

An investment in the company’s digital offering could improve the customer experience, while providing more opportunities to add new products and features in a short timeframe. Bed Bath & Beyond is also investing in its stores as it seeks to reduce inventory levels and offer greater inspiration to customers.

Dynamic pricing could increase the company’s competitive advantage versus sector peers. Its focus on margins over short-term sales growth may lead to declining comparable sales, but the elimination of less profitable products could improve its long-term financial performance. Having underperformed the S&P 500 over the last year, the stock has turnaround potential.

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