Increasing online sales couldn't offset declines in brick-and-mortar business as home goods and furniture retail company Bed Bath & Beyond missed expectations for its third quarter of fiscal 2016, sending shares down more than 5% in late trading Wednesday.
Bed Bath & Beyond's Q3 same-store sales decreased by approximately 1.4%, wider than last year’s decrease of approximately 0.4% and its worst result this year, by retail research agency and consulting firm Conlumino’s measure.
Same-store e-commerce sales rose more than 20% but Q3 same-store sales from stores fell in the “low single-digit percentage range,” Bed Bath & Beyond said Wednesday, with CFO Susan Lattmann attributing the decline to "a decrease in the number of transactions in our stores, partially offset by an increase in the average transaction amount" on a call with analysts.
Bed Bath & Beyond's Q3 net sales were approximately $2.955 billion, a 0.1% bump from year-ago net sales of approximately $2.952 billion. The results missed FactSet analyst expectations for net sales of $3 billion. The brightest spot in the earnings report is also the source of some of the retailer's undoing: Digital sales rose more than 20%, but there’s evidence that Bed Bath & Beyond's e-commerce efforts are cannibalizing physical store sales, according to Neil Saunders, CEO of Conlumino.
One of the retailer’s essential problems is that it runs a largely old-fashioned brick-and-mortar operation selling goods that have largely morphed into commodities — items consumers buy mostly based on price, and can often find at Amazon. Product differentiation is key to rising above that situation, and to that end, Bed Bath & Beyond recently introduced a new drapery design gallery in select stores and online, executives said Wednesday. The retailer also recently acquired online furniture seller One King’s Lane and Personalization Mall to beef up and diversity its merchandising.
Those are positive steps forward, Saunders said in an email to Retail Dive, but they don’t address Bed Bath & Beyond's need to invest more in the legacy component of its business — its stores — or other fundamental issues.
“In our view, both additions are sensible and should help to drive sales over the longer term. However, neither solve the underlying issues in the core business, nor will they reverse the margin declines,” Saunders said. “In our view, one of the issues with Bed Bath & Beyond is that many of its stores are not as compelling as they should be, and this makes them more susceptible to cannibalization from the online operation. While stores are far from dire, the company’s Aladdin’s Cave approach to merchandising means that shops can be difficult to navigate and find products that are desired. It also makes it difficult to browse and find inspiration. In short, this makes it more convenient and easier to go online.”
Speaking to analysts Wednesday, Bed Bath & Beyond CEO Steven Temares said that consumers need some time to realize the changes afoot. To raise awareness, the company released its first-ever home catalog in early October, with 84 pages of product inspiration for the entire home.
"In some respects, we’re at the beginning stages of building awareness of our wide-ranging assortment of differentiated products, services and solutions for the home, and the accompanying life stages and life interest, through more inspirational imagery and content," Temares said, according to a transcript from Seeking Alpha. "Catalogs of this type are one way to introduce customers to these expanded offerings and our broad-based expertise."
Still, in the meantime, the price vulnerability of Bed Bath & Beyond's merchandise continues to invite price competition, and the retailer’s famous blue coupons continue to erode margins further, Saunders said. While home sales remain robust, which has buoyed home improvement retailers, any downtrend (which could be brought about by the Fed’s recent rate hike) could hit the company further, he warned.
"Looking ahead, we believe that more intense price competition over the holiday period will result in a further softening of margins,” Saunders said. “Further on into the next fiscal year, a softening in the housing market could affect Bed Bath & Beyond and, in our view, will do so more than at other retailers. Overall, the business is not in a dire state, but it will continue to struggle with growth on both the top and bottom lines.”