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Bed, Bath & Beyond Executes Growth Strategy Despite Recession

Bed, Bath & Beyond's strong financial position puts it in a particularly strong position to explore the opportunities an economic recovery might offer.

That strength has allowed it to do something in the downturn that many other retailers have had to forget about, and that's grow. And not just a store here and there. The company has been able to execute on its long-term strategy of growing its core namesake stores and adding new locations under its Harmon health and beauty care banner, buybuy Baby children's specialty operations and Christmas Tree Shops, a seasonal specialist that also sells home furnishings at a somewhat lower price/quality position than Bed, Bath & Beyond stores.

In the recently completed second quarter, noted Wedbush Morgan analyst Joan Storms, Bed, Bath & Beyond posted earnings per share of 52 cents compared to 46 in last year's quarter beating guidance of about 42 cents, consensus estimate of 48 cents and her reckoning of 50 cents. Comparable store sales did slip 0.6 percent, but that was inline with guidance and better than the consensus estimate of negative 1.2 percent, Storms pointed out. Total sales were up just over three percent to $1.92 billion, beating both her and the First Call estimate of just under three percent. Gross margin improved 50 basis points to about 40 percent due to lower product costs, partially offset by higher markdowns and coupon redemptions.

Consumers might be more eager to cash in those coupons, Bed, Bath & Beyond's primary marketing vehicle, in the recession, but they are also a reason to consider the company's prospects may be better than most. In a post recessionary period with consumers not quite as bargain sensitive, the company shouldn't have to distribute as many of those coupons with primary competitor Linens 'N Things â€" another retailer fond of mailing those little $5 off certificates â€" out of business.

The comparable store sales number demonstrates that Bed, Bath & Beyond has felt the effects of the recression, but it continues to add stores in line with its larger plans. The company added nine Bed, Bath & Beyond stores in the latest quarter, three buybuy BABYs and one Harmon to end the quarter with 1,056 stores, plus two Home & More stores it operates in a Mexican joint venture. Square footage grew 5.5 percent to 32.5 million. In all of fiscal 2008, Bed, Bath & Beyond opened 67 stores, just eight fewer than in 2007, ending the year with 1,035 stores and 6.2 percent more square footage than it operated previously.

Through the end of the current fiscal year, Bed, Bath & Beyond plans to debut a total of 58 new stores across all concepts including 35 namesake stores, seven Christmas Tree Shops, 12 buybuy BABY stores and four Harmon Face Values stores. Purchased two years ago from family of one of Bed, Bath & Beyond's founders, buybuy Baby was an established but stagnant eight-store chain that the company is now growing at a rapid rate proportional to its size. In addition to the four new Harmon Face Value locations and, perhaps more importantly, Bed, Bath & Beyond continues to add Harmon Face Values health and beauty care departments within more of its sister store concepts, a process that began with the eponymous stores and now include Christmas Tree Shops and buybuy Baby units as well.

So, with Bed, Bath & Beyond, current growth isn't a matter of opening locations that it has committed to and couldn't get out of or building where the location was impossible to pass up. The company is adding locations at a pace that might be a bit slower than before the recession but not much and probably prudently so. At the same time, it is pressing the opportunities it has identified across its store portfolio, pushing buybuy Baby, for an example, in a period when Babies "R" Us is consolidating locations with parent Toys "R" Us rather than adding lots of new stand alone stores.

In a research note, Storms noted:

The company should continue to benefit from industry consolidation, good visibility for cross merchandising opportunities and future growth potential for newer concepts, and strong [balance] sheet and cash flow. With Linens N Things going away, we see three distinct sales and margin drivers: new customers to drive sales and comps, less gross margin pressure from coupon redemptions and lower advertising expense from reduced coupon distribution. The company's newer concepts, Harmon, Christmas Tree Shops and buybuy Baby, have strong cross merchandising opportunities, which should drive store productivity and have organic growth potential longer-term.
Bed, Bath & Beyond still faces competitive challenges. Walmart has expanded and upgraded home departments and has been enjoying positive consumer reaction. Something similar has occurred at J.C. Penney as well. Target continues to find new designers and doyens to endorse home goods for it. Also, two smaller home furnishings chains, HomeGoods and Anna's Linens, have also been expanding despite the recession. HomeGoods, like its sister TJX apparel operations TJ Maxx and Marshalls, sells overstocked goods at a steep discount. As for Anna's Linens, it may take more of a bargain and soft goods approach to things than Bed, Bath & Beyond, but its customer base will certainly overlap with B3s, so it may turn out to be something of a challenge, particularly to Christmas Tree Shops.

Still, with all that said, Bed, Bath & Beyond has established itself solidly as a place consumers can find solutions to a range of household needs consistently and severally. Other retailers hit critical concerns and categories, but not at the same depth, and, in some of its growth segments, such as fine china, Bed, Bath & Beyond has little competition for mass-market shoppers. On top of all that, it is borrowing from all its concepts to make the customers shopping trip more productive. Few retailers have stayed so true to form through the economic downturn as Bed, Bath & Beyond, and fewer will be in so strong a position to dominate their sector in a recovery.