FINANCE

Analysis: Bed Bath & Beyond’s ‘short-term pain’ necessary for long-term survival

[For the fourth quarter, Bed Bath & Beyond’s overall sales fell 11% and same-store sales fell 1.4%]

Although Bed Bath & Beyond’s fourth-quarter results are colored by a shorter trading period compared to last year, they are nevertheless poor and underline the fact that Bed Bath & Beyond continues to lose share in what is a reasonably buoyant market. The $312 million loss before taxes is particularly disappointing and is the result of asset impairments. Fortunately, a tax benefit to the tune of $58 million made the net earnings loss a little less steep.

Given one less week of trading, the comparable sales figure is the best indicator of underlying performance. And on this measure, Bed Bath & Beyond has been found wanting with a 1.4% decline. This follows a 0.6% dip in the prior year. On this front, one of the main barriers to growing sales is a lack of inspiration and excitement in stores combined with extremely poor merchandising. This is both deterring potential shoppers from visiting and reducing conversion rates and transaction values.

This has become an especially pressing problem as rivals have expanded and as online has started to play a greater role in home furnishings and home products purchases. Against this more competitive backdrop, Bed Bath & Beyond has not delivered. It has neither the authority and convenience of a player like Amazon, nor the excitement and inspiration of a shop like HomeGoods. It is caught somewhere in the murky middle ground.

These problems are not new. Indeed, Bed Bath & Beyond’s store standards have been lacking for a very long time. However, as much as this needs to be resolved, it would be unfair to charge management with ignoring the situation. Over the past half year or so, there has been movement in terms of trialing a number of new store formats. These all represent a step up on the existing format, albeit in different ways, and the company is testing out which ones work best before rolling them out further.

Admittedly, the pace of change is much slower than we would like but we appreciate that investing in store is a costly exercise and, therefore, is one that management wants to get right. As such, prudence is no bad thing. We broadly reject the calls of activist investors for a wholesale change of management, if only because this will not solve any of the issues unless accompanied by a clear new vision and plan – something no activist investor has yet put forward.

Away from stores, there has also been progress online where Bed Bath & Beyond has made investments to its website technology to facilitate better loading page times and to allow greater flexibility in how products and trends are displayed. These are small steps but ones that make the site easier and more pleasant to shop. The next challenge is in making Bed Bath & Beyond online a destination for home furnishings — which it currently is not.

Overall, Bed Bath & Beyond has a lot of work to do. We get the impression that the company is moving gently in the right direction and that it is testing some interesting things. However, it desperately needs to move into full execution mode before long if it is not to fall even further behind. We are also under no illusions that the changes which are needed will have an impact on the bottom line. However, this short term pain is necessary for the long term survival of the company.

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