Shares of home goods retailer Bed Bath & Beyond (NASDAQ:BBBY) slipped nearly 9% after the company reported mixed third quarter earnings on Jan. 8. Its earnings of $1.19 per share were in line with analyst estimates, but revenue -- which rose 2.8% year over year to $2.94 billion, according to S&P Capital IQ -- missed the consensus estimate of $2.97 billion.

Source: Wikimedia Commons, Anthony92931.

Is Bed Bath & Beyond's recent dip a buying opportunity for long-term investors, or are there better stocks to buy in the fickle home-goods market?

Understanding the big picture
Bed Bath & Beyond is influenced by two major factors: the U.S. housing market and friction between big box and e-commerce retailers.

Bed Bath & Beyond is highly dependent on home sales, since customers generally make their largest purchases of home goods when they first move in. The U.S. housing market steadily improved since the beginning of 2014, but sales of new single-family homes slipped last October and November, as sales of existing homes hit a six-month low in November. (That slowdown is attributed to stagnant wage growth delaying the formation of households.)

That's why Bed Bath & Beyond's third quarter comparable sales growth of 1.7% missed its own forecast of 2% to 3%. The hopeful news is that the housing market might bounce back in 2015, thanks to low unemployment rates, low oil prices (cheaper construction costs and higher consumer savings), and historically low interest rates.

However, e-commerce giants like (NASDAQ:AMZN) have forced Bed Bath & Beyond to keep prices low and invest in an "omnichannel" strategy that blends together its e-commerce and brick-and-mortar businesses. In the first nine months of 2014, Bed Bath & Beyond's sales, general, and administrative expenses climbed 4.2% year over year due to those investments. Further price cuts and bigger omnichannel investments could cause Bed Bath & Beyond's earnings -- which fell 7.6% YOY during the first nine months -- to keep dropping.

An uneven competitive landscape
Ever since its top rival Linens & Things was liquidated in 2008, Bed Bath & Beyond has faced very few direct competitors. Bed Bath & Beyond indirectly competes against Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Pier 1 Imports (NYSE:PIR), and Williams-Sonoma (NYSE:WSM) (which also owns Pottery Barn), but it remains the largest retailer of home goods in the country.

As diversified superstores, Wal-Mart and Target are less exposed to the housing market, while Pier 1 and Williams-Sonoma's smaller stores offer narrower selections of high-end linens, kitchenware, home furnishings, specialty foods, and gifts.

Over the past three quarters, superstores have fallen out of favor as sales at specialty home retailers like Pier 1 and Williams-Sonoma have climbed. Since Bed Bath & Beyond straddles both markets, its comparable sales growth remains higher than superstores but lower than specialty home retailers.


Three quarters ago

Two quarters ago

Last quarter

Bed Bath & Beyond












Pier 1 Imports








YOY comparable sales growth. Source: Quarterly earnings reports. *U.S. only, excludes Sam's Club and fuel sales, **U.S. only, ***Across all brands.

Revenue, earnings, and valuations
Although Bed Bath & Beyond has recently underperformed Pier 1 Imports and Williams-Sonoma, it has a solid record of outperforming both companies, as well as Wal-Mart and Target, in terms of long-term revenue growth.

BBBY Revenue (TTM) Chart

Source: YCharts

But in terms of bottom-line growth, Williams-Sonoma crushes Bed Bath & Beyond with big triple-digit gains -- a situation which is unlikely to improve as the company aggressively matches online prices and invests in more e-commerce initiatives.

BBBY Net Income (TTM) Chart

Source: YCharts

The silver lining is that Bed Bath & Beyond stock -- which trades at 13.5 times forward earnings -- is still considerably cheap compared to its rivals. Wal-Mart and Target both have forward P/Es between 16 and 17, while Pier 1 and Williams-Sonoma, respectively, trade at 15 and 21 times forward earnings.

The verdict
Unfortunately, Bed Bath & Beyond's cheap valuation shouldn't offset concerns about its dependence on the volatile housing market, margin pressure from matching online prices, and sliding profits. The company also remains at risk of losing lower income customers to Wal-Mart and Target, while its higher income ones flock to Pier 1 Imports and Williams-Sonoma.

Bed Bath & Beyond might be worth buying after the housing market stabilizes, comparable sales improve, and its bottom line starts growing again. But until those three things happen, this stock is definitely not on my shopping list for 2015.