A New Threat for Bed Bath & Beyond?

Despite the bankruptcy and dissolution of its primary rival Linens 'n Things, home-goods retailer Bed Bath & Beyond (NASDAQ: BBBY  ) is only just starting to capitalize on the opportunity because the recession caused not only financial angst among its own customers, but also cratered the housing market, which had always been a driver of its business.

As the economy stumbles along blindly on the path to recovery and housing gets its footing again, it ought to spell greater opportunity for the retailer whose stock, while outpacing the broad market averages, has sorely lagged peers Williams-Sonoma (NYSE: WSM  ) and Pier 1 Imports (NYSE: PIR  ) over the past five years. 

Part of the problem has been its lack of focus on e-commerce, which has always been something of an afterthought for the home-goods retailer. Where analysts say Williams-Sonoma derived some 38% of its revenues from its website in 2012, Bed Bath & Beyond generated only around 3%, with even Restoration Hardware (NYSE: RH  ) doing more online than its bigger rival (and its stock has also performed more ably over the two years it's been public as well).

<a href="http://ycharts.com/companies/BBBY/chart/"><img src="http://media.ycharts.com/charts/2bed99c3113ea2e5aeb4d3dfaed0e54e.png" alt="BBBY Chart" /></a><p style="font-size: 10px;"><a href="http://ycharts.com/companies/BBBY">BBBY</a> data by <a href="http://ycharts.com">YCharts</a></p>

Bed Bath & Beyond apparently realized its shortcomings in this area this year and revamped both the back end and front end of its website for not only its eponymously named stores, but also its buybuyBaby division. While the retailer has never been very upfront with investors about how its many ancillary businesses are performing -- it doesn't break out results for the infant unit, its discount Christmas Tree Shops brand, or the beauty care Harmon Face Values division -- the epiphany that it needed to do something couldn't have come soon enough.

Although department-store chain J.C. Penney (NYSE: JCP  ) is seen perhaps more as a clothing retailer than anything else, at more than 20% of its total revenues, home furnishings carry just as much heft as women's fashion does. And despite its well-documented troubles, Penney looks like it's rebounding, and leading the way is its home-furnishings business, which represented about half the growth its entire online channel enjoyed.

When Penney updated the markets on how it fared in November, Wall Street was underwhelmed by the totality of its achievements, though I actually thought it showed progress. Particularly in e-commerce, the troubled retailer said its efforts were running well ahead of last year while falling in line with October's trends, when it reported gains of almost 38% beyond the year-ago period. 

So Bed Bath & Beyond has its traditional peer group building up a head of steam while also having to fend off oblique competitors. Now, like a cold nightmare from the past, Linens 'n Things is being resurrected. 

Source: Linens 'n Things.

When it went bankrupt in 2007, it ended up closing all of its stores and sold off the inventory and its LNT.com e-commerce platform for $1 million to a group of retail liquidation firms, which in turn sold the assets two years later to an intellectual-property development joint venture. They developed the brand into a Web-only retailer, and they've just announced that they sold it for $10 million to a group headed up by private-equity firm Carlyle Group, which has plans to develop the e-commerce site further and perhaps even bring back bricks-and-mortar stores again.

Galaxy Brand Holdings, which has taken over other seemingly defunct retail brands such as And1, Avia, and Nevados, believes there's enough name recognition and marketability left in Linens 'n Things to resurrect the retailer and reintroduce it to consumers.

At its height, LNT had some 570 stores that generated $1.5 billion in sales. That pales in comparison with Bed Bath's 1,011 stores and $11.5 billion in revenues, but as Galaxy realized with And1, it didn't need to match Nike or Adidas in sales to make an impact; it could carve out a nice niche for itself because of the close affinity consumers retained for it with basketball, and now it finds itself back on store shelves in more than 25 countries. No doubt consumers may still have enough fond memories of Linens 'n Things to make it a credible retailer again, too.

Being a lumbering giant in the home-goods space, Bed Bath & Beyond probably thought it didn't need to pay much mind to the Internet, but that's not a luxury it can afford anymore. Its sales have been growing only because of expansion and acquisition, and while same-store sales came out slightly ahead of the year-ago period on stronger traffic and higher average transaction size, it's also resorted to being more promotional again. Coupled with the acquisition of Cost Plus World Market, margins are under pressure.

At 13 times earnings estimates, the market is valuing the home-goods retailer more cheaply than its peers, but when compared with analyst growth projections it's at best fairly valued and perhaps slightly overvalued. Thus I find Bed Bath to be a worthy holding if it's already in your portfolio, but I wouldn't go beyond that at this time if it's not.

Not your mother's retailer anymore
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