Bed Bath & Beyond Has Some Kinks in Its Armor

With any company, improvements can always be made to ensure all operations are being handled in the best possible way to promote the best results. Despite how well Bed Bath & Beyond (NASDAQ: BBBY  ) is managing its products, pricing, and customer service, the home goods retailer is lacking in other areas. Let's take a closer look at these weaknesses and decide whether or not these issues will significantly damage the company's short and long-term growth.

Slip in gross margins
Even though sales revenue is high for Bed Bath & Beyond, its gross margins are diminishing. This decline is mostly attributable to more consumers taking advantage of Bed Bath & Beyond's 20% off on one item coupons. Customers can use this coupon on any one item with no attached restrictions. What's even more interesting is that Bed Bath & Beyond will accept these coupons at any one of its stores, such as buybuy BABY, and not solely at a Bed Bath & Beyond. For the past five years, its average gross profit margin has been 40.74%. However, in recent quarters, the company's gross margin has fallen below average.  In fact, in the third quarter ended November 30, 2013, Bed Bath & Beyond's gross profit margin came in at 39.15%. Bed Bath & Beyond needs to decide if this slip is something to be concerned about despite company sales remaining strong and steady. 

Lack of e-commerce sales
Technology continues to define our society by how we communicate and spend our time, but more importantly, it is changing the way people shop. The Internet and companies like Amazon.com (NASDAQ: AMZN  ) make it easy for customers to shop a large collection of goods without having to wait in line. In addition, customers can normally find relatively low prices online, and therefore are willing to pay for the added expense of shipping the item.

While Bed Bath & Beyond holds a very strong market position, its sales could be even higher if the company could attract regular online shoppers to its e-commerce sites. For 2012, Bed Bath & Beyond's e-commerce sales made up only 3% of its total sales whereas competitor Williams-Sonoma  (NYSE: WSM  ) , which also provides an assortment of products for any space within the home, generates about 40% of its sales from its online shopping outlets.  Unfortunately, FY 2012 e-commerce sales for both companies are all we have to go off of since neither company includes separate figures for their e-commerce sales in any of their quarterly reports.  Once FY 2013 wraps up, we will have a better, more accurate measurement of Bed Bath & Beyond's e-commerce sales and whether or not they still represent less than 5% of the company's total sales.

While Bed Bath & Beyond is currently working on implementing technology into many of its stores along with redesigning its e-commerce business, it needs to jump on the social media band wagon if it plans on keeping its market share. All in all, it's losing sales and customers to retailers like Amazon.com and Williams-Sonoma. 

Consumer discretionary
Despite all of the company's success, particularly in the face of juggernaut retailers Wal-Mart and Target, Bed Bath & Beyond sells things people do not need on a consistent basis. Wal-Mart and Target, on the other hand, sell both necessities and non-essentials, which works in their favor during an economic recession. Bed Bath & Beyond's entire product assortment represents purchases that can be put off in an economic downturn.

We saw this in "The Great Recession" when the company's earnings per share went from $2.10 in 2007 to $1.64 in 2008. This should not come as a surprise, given that the housing market performed terribly, and as such, consumers had less disposable income. Since Bed Bath & Beyond's sales are largely tied to housing market conditions, sales were largely affected during this time. That being said, the company quickly rebounded with EPS coming in at $2.30 for 2009, which clearly tells us the company has staying power.

Foolish takeaway
Bed Bath & Beyond needs to be extremely careful in how many discounts and promotions it provides in order to sustain profits. Furthermore, the home goods retailer should remain on its toes, ready to make any necessary changes to coincide with market trends and economic changes.

Foolish investors should take these weaknesses of Bed Bath & Beyond into account before committing cash, weighing the company's strengths and weaknesses. In my opinion, its weaknesses are very real but not insurmountable for this unique home goods retailer. 


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