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Stock Strategist

Sale at Bed Bath & Beyond

This no-moat retailer is trading well below our fair value estimate.

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 Bed Bath & Beyond (BBBY) is one of the better-operated companies in the retail industry. It has a best-in-class decentralized merchandising strategy, an improving omnichannel presence, untapped international growth opportunities, and widely recognized retail brands like the namesake Bed Bath & Beyond and Cost Plus concepts. Management has constructed a unique store layout that groups related product lines into separate areas, creating the appearance and feel of a collection of individual specialty stores. This layout, which allows store managers to tailor the merchandise mix and respond to changing trends and conditions, has historically been prudent; the firm has generated average sales per square foot of $273 over the past three years.

Mobile and web growth indicates that customer-led initiatives are taking hold and such investments have a longer-term payoff for brand equity, likely positioning the business more strategically ahead. Merchandise initiatives to increase brand loyalty, including offering exclusive products, private labels, and quality for value, make the customer base stickier over time, and investments in point-of-sale and analytic programs will help deliver these products to the right place at the right time. The risk to success here seems to be that investment may need to be ongoing and inflated to historical levels if Bed Bath & Beyond wants to remain relevant and visible, and the payoff in operating margin expansion may be stifled by pricing pressures.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.