Bed, Bath & Beyond Has Nothing to Worry About From 'At Home' IPO

At Home isn't a new competitor, just new to the public markets. It previously was called Garden Ridge, but new owners rebranded it and led it to a public offering, perhaps at the exact wrong moment. Image source: At Home.

The IPO of home decor retailer At Home can hardly be seen as good news for industry giant Bed Bath & Beyond (BBBY), which is already suffering from flat sales, falling profits, and a weakened retail environment. A new competitor for those tight consumer dollars isn't going to help.

Yet this development only seems problematic; Bed Bath & Beyond investors needn't worry that At Home will be a threat. The new retailer's entrance into the market was only timed to capitalize on the housing market's recent strength. While there are things Bed Bath & Beyond investors should worry about, At Home isn't one of them.

Tale of the tape

A comparison of the two retailers shows why Bed Bath & Beyond doesn't have to worry that a new rival will steal customers or market share.

Data source: At Home and Bed Bath & Beyond SEC filings.

Although the size of the average At Home store is what lends itself to comparisons to Swedish furnishings outlet Ikea (though even those stores are twice as large, at around 300,000 square feet), and their expanse lets them devote more shelf space and square footage to individual products, it also makes each store more expensive to build and limits just how many stores it can build. Each new addition will cannibalize sales at an existing location if they're situated too close to one another.

Hurry up and wait

Yet At Home's growth plans don't seem nearly aggressive enough to fully challenge Bed Bath & Beyond. Over the last five years, it's opened almost 60 stores, or about 12 a year, but it plans to step up the pace with around 22 new stores opened annually, hitting an eventual maximum of 600 stores. Bed Bath & Beyond, on the other hand, has long seen its maximum opportunity as 1,300 stores, and though it's had to slow the pace of its own store openings thanks to market conditions, it would still put it at twice the size of At Home.

At Home's stepped up expansion rate doesn't seem to take into account the weakening under way in both housing and consumer spending. While two dozen stores a year is glacial if it's trying to compete nationally with the industry leader, the contraction under way in the home goods sector could make even that pace too fast.

According to credit card spending data from Bank of America, home improvement and home goods sales are falling. They might have ticked higher in June, but they tumbled again last month and are now down 3.4% for the year. That's a warning sign not only for an established national retailer like Bed Bath & Beyond, but especially so for an emerging competitor like At Home that's hoping to leapfrog to the forefront.

Is there really anything new here you haven't seen before at dozens of other home goods retailers, whether in store or online? But you can't buy At Home products online, and the retailer has no plans of going digital. Image source: At Home.

Digital? What's that?!

More problematic is the shift occurring in where consumers are buying their home goods. Trade site Internet Retailer reports e-commerce accounted for 18% of all home goods sales in 2015, a 220 basis point jump from the year before, with the top sites like Amazon.com (AMZN 0.81%) and Wayfair (W 8.44%) collectively growing their sales at a better than 21% pace, or more than four times the rate of the overall industry.

Indeed, Wayfair just reported second-quarter earnings that showed sales surged 60% year over year, though its stock was hit hard as its expenses jumped almost 70%. Yet bricks-and-mortar retailers are showing better online gains, too, with Williams-Sonoma reporting 8.5% growth in e-commerce sales compared to 4.5% comps growth at the stores of all its brands. Pier 1 Imports saw its online sales grow to account for nearly 20% of total revenues this quarter, and even Bed Bath & Beyond reported its digital channel's sales grew in excess of 20% last quarter.

But At Home doesn't even have a functional website for making sales -- and has no plans to establish one, either. At a time when more consumers are shopping online, that's a huge oversight and missed opportunity.

Good, but not great

As a niche, regional retailer At Home is a good business with profitable growth, a two-plus-year string of positive comps, and a value offering that's not really seen in other chains. Yet home goods isn't exactly an underserved market, with strong, national chains already established and online retailers taking an ever-increasing share of the market.

While many of these factors will impact Bed Bath & Beyond as much as At Home, a new competitor in an already burgeoning marketplace shouldn't concern the home goods leader all that much.