Please ensure Javascript is enabled for purposes of website accessibility

Is Bed Bath & Beyond Inc. Beyond Help?

By Rich Duprey - Jan 15, 2016 at 5:47PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The home goods retailer seems determined to pursue strategies that will all but guarantee underperformance.

New store openings continue to push Bed Bath & Beyond sales higher, but profit margins lag as it's forced to be overly promotional to attract customers to them.

The retail landscape for home goods is evolving, but it's the same forces that drove Linens 'n' Things from the market that are now pressuring Bed Bath & Beyond (BBBY -18.59%). Though it still dominates the niche, the retailer's recent 2015 fiscal third-quarter earnings suggest that its efforts to combat the challenges are pressuring its profitability. Meanwhile, its determinedness to maintain its current course could mean there's little hope it will recover anytime soon.

The home goods retailer's net sales increased by 0.7% from the year-ago period, ending at $2.95 billion on a constant-currency basis; its same-store sales were essentially flat. Although sales through its digital channels increased by more than 25%, traffic into its stores was disappointing. Bed Bath & Beyond nevertheless said that it's on track to open 29 new stores across the fiscal year, with 12 locations in the third quarter alone.

Many of the retailer's rivals are closing stores to align their operations with market conditions. Macy's said recently that it is closing hundreds of stores and laying off thousands of employees as it struggles to attract customers in this uncertain economic period. Similarly J.C. Penney, which is doing demonstrably better than its peers, just announced that it will close seven stores, and Wal-Mart declared its plans to close 269 locations, more than half of which are in the U.S.

Bed Bath & Beyond may be steadfast in its determination to plow ahead, but it's not the market share land grab it appears.

The home goods retailer is relying on constant promotions to get customers into its stores. Its sales and couponing practices are pressuring its already-slim operating margins, which have fallen over the past three years. In effect, its running harder and faster merely to stay in place.

Despite this, Bed Bath & Beyond's financial strength remains fairly solid, and it's still producing strong free cash flow. But because it self-funds the construction of new stores out of those cash flows, it's important they provide a good return quickly. Declining traffic, weak sales, and falling profitability upsets that delicate balance.

Now it's forecasting comps for the fourth quarter to be anywhere from flat to 2% higher, but whatever growth it achieves will be from its digital sales channel and not from its physical locations. That can only mean it will be hard-pressed to reverse its long decline, and though its stock trades 40% lower today than it did a year ago, investors could see Bed Bath & Beyond drop lower still.

Rich Duprey owns shares of J.C. Penney Company. The Motley Fool recommends Bed Bath & Beyond. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bed Bath & Beyond Inc. Stock Quote
Bed Bath & Beyond Inc.
BBBY
$18.79 (-18.59%) $-4.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
395%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.