Since the Great Recession, Bed Bath & Beyond (NASDAQ:BBBY) has been mostly successful despite the pressure online retailers like Amazon.com (NASDAQ:AMZN) continue to place on traditional brick-and-mortar retailers. In addition to the e-commerce threat, traditional retailers like Pier 1 Imports (NYSE:PIR) and Wal-Mart (NYSE:WMT) in recent years have added more merchandise comparable with Bed Bath & Beyond.
However, showrooming for Amazon.com, the heavy use of couponing to attract customers, and possible market saturation are some of the real bed bugs at Bed Bath & Beyond.
Bed Bath & Beyond's earnings and conference call highlights
This past week Bed Bath & Beyond disappointed investors with its 2013 third-quarter earnings and fourth-quarter outlook, which caused the stock to drop over 12% the following day.
Comp sales, a key retailer metric that focuses on growth at existing stores, increased just 1.3%. This was below the 1.7% increase in 2012's third quarter. While net sales increased 6% to $2.9 billion, earnings-per-share, or EPS, of $1.12 came in below expectations of $1.15.
The outlook the company gave during the conference call made matters worse. Bed Bath & Beyond cut guidance for the fourth quarter of 2013 and the full year to $1.60-$1.67 and $4.79-$4.86, respectively.
Additionally, the conference call hinted that market saturation may be near. In addition to the Bed Bath & Beyond concept, the company also owns the World Market, Christmas Tree Shops, Harmon stores, and buybuy BABY store concepts. However, store space increased just 1.4% on a year-over-year basis across all concepts.
The fact that 46% of the 10.5% increase in net sales for the first nine months of 2013 came from the inclusions of World Market and Linen Holdings may also suggest that recent acquisitions have prevented earnings from missing expectations by even more.
The real bed bugs beneath Bed Bath & Beyond
Showrooming, when customers use brick-and-mortar retailers to examine products before buying them at online retailers like Amazon.com, has grown in popularity. While all retailers have been victims of showrooming to some extent, Bed Bath & Beyond ranked first in a 2013 Placed study that reviewed nearly a dozen brick-and-mortar retailers. The study revealed that Amazon.com customers were 27% more likely to showroom a Bed Bath & Beyond.
Bed Bath & Beyond's popular 20%-off coupon may have long-term negative effects. Coupon usage among customers was one of the reasons cited in the conference call for the decline in gross margins for the third quarter. Not only were customers using the coupons more often, they were using them to buy items within lower-margin categories.
Bed Bath & Beyond is also behind in its online presence. The stock has been popular for its buyback program. However, in hindsight, it looks like it would have been a better long-term strategy for the company to invest in its online channel years ago since only 1%-2% of current revenue comes from online purchases. Not only is this a weakness to Amazon.com, it's also a weakness to traditional brick-and-mortar retailers like Pier 1 Imports and even Wal-Mart.
Recently, Pier 1 Imports reported that online sales represented over 4% of total sales, while Wal-Mart said it is now online in 10 countries.
Lastly, internal employee dissatisfaction may be the worst bed bug overall. Bed Bath & Beyond currently has an average employee rating of 2.7 out of 5.0 and CEO Steve Temares has a 49% approval rating on Glassdoor.com. Some of the common complaints listed by employees include poor upper management, poor inventory management, lack of promotions, and obsolete technology.
While Glassdoor.com might attract a disproportionate number of disgruntled employees, this just adds to Bed Bath & Beyond's other bed bugs that may be coming to the surface sooner rather than later.
Why Pier 1 Imports and other retailers have an edge
Pier 1 Imports has been able to survive showrooming and the threat of e-commerce mainly because it offers an unique selection of over 6,000 items that are constantly imported from around the world and can't be found anywhere else. Showrooming is nearly impossible at its stores because, unlike Bed Bath & Beyond, Pier 1 Imports owns nearly all of the brands it sells.
On the other hand, retailers like Wal-Mart are like Swiss Army knives. Wal-Mart offers and does a little of everything from changing your car's tires to selling you shampoo. Even retailers like Target and Kohl's have expanded their business models to sell, among other things, clothes, home furnishings, bedding, and jewelry. This gives customers other incentives to visit these retailers and gives them an edge over Bed Bath & Beyond.
Bed Bath & Beyond's fourth quarter and full-year guidance cuts may signal something bigger. Unlike other industries, home furnishings, which include bedding, bath, kitchen, and cookware-related products, are replaced frequently -- even during rough economies. Bed Bath & Beyond shareholders looking for a pop in 2014 as the economy is supposed to be improving may be left disappointed. The fact that other retailers -- both traditional and online -- are gradually selling more home furnishings only adds insult to injury.
Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Bed Bath & Beyond. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.