It seems hard to believe that a company whose stock is down 20% since the beginning of the year could still have further to fall, but there's still plenty that can go wrong for Bed Bath & Beyond (NASDAQ:BBBY). Of course, these are all potential pitfalls, not definite outcomes. Bed Bath & Beyond has plenty of ways to get back on track, but here are three ways it could all go wrong.
1. Comparable sales could continue to stutter
In fiscal 2012, Bed Bath & Beyond increased comparable-store sales by 2.7% over 2011. In 2013, it increased comparable sales by 2.4%. In the first quarter of fiscal 2014, it only managed a 0.4% increase. Even though sales growth has been on the slide, management is still modelling a 3% comparable sales increase for the full fiscal year. It's an optimistic outlook, to be sure.
Bed Bath & Beyond's plan is to go heavily into promotion mode. On its earnings call, management said that gross margin was going to take a hit as the company has planned a "shift of the mix of merchandise sold to lower-margin categories, an increase in coupon expense, and an increase in net direct to customer shipping expense."
If those plans don't end up bringing in more business, Bed Bath & Beyond is going to take a damaging hit. It will have invested in sales and gotten nothing in return.
2. Gross margin could fall even further
Right now, Bed Bath & Beyond is suffering from a brand strength issue. Consumers aren't filling the stores, which, in turn, is pushing down comparable sales, which means the company is looking to promotions in order to get total revenue back up. Promotions are taking their toll on the business, though, and margins are suffering.
The chart above shows Bed Bath & Beyond's operating and gross margins over the last five years on a trailing-12-month basis. The company is clearly on the wrong path, and last fiscal year, gross margin fell from 40.2% to 39.7%. That affected operating margin as well, pushing it down from 15% to 14% over the same period.
The culprit is the promotional environment every retailer is facing down right now. Bed Bath & Beyond is fighting for a limited amount of resources, and customers are still unwilling to part with their cash for anything other than the best deal. If Bed Bath & Beyond can't get sustainable customer growth out of its promotions, it's going to have to keep pushing deals and discounts just to keep the top line afloat.
3. The competition could beat Bed Bath & Beyond to the punch
Even if the company does everything it can to get shoppers through the door, it might not be enough. Consumers are now able to purchase mixers, towels, sheets, and duck-themed toilet brushes in just about every superstore in America. Bed Bath & Beyond's big-box model may simply be going out of style.
On the other end of the shopping spectrum, smaller stores like Williams-Sonoma (NYSE:WSM) have focused in on the cream of the home decor crop, and they may be forcing Bed Bath & Beyond into a position that simply can exist in its current form. Williams-Sonoma has been increasing margins and growing sales over the last five years. In its last fiscal year, operating margin grew from 10.1% to 10.3% while comparable-store sales rose 8.8%.
By focusing on a small section of the market, Williams-Sonoma has been able to increase its brand appeal, pulling in new customers without the heavy reliance on discounting. Bed Bath & Beyond is losing customers to these targeted brands on one side, and to big superstores on the other. As the middle ground continues to shrink, the company is going to have to adapt or fall.
The bottom line
Of course, Bed Bath & Beyond still has plenty of levers that it can pull to keep itself in a winning position. New product mixes, new store locations, and a conservative use of capital can keep investors and shoppers happy at the same time. Bed Bath & Beyond is still in charge of its own destiny, but there are plenty of roadblocks to overcome.
Andrew Marder owns shares of Williams-Sonoma. The Motley Fool recommends Bed Bath & Beyond and Williams-Sonoma. 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.