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Why Bed, Bath & Beyond Has Recovery Potential

Having fallen 27% in the last year, Bed, Bath & Beyond Inc (NASDAQ:BBBY) could offer good value for money. The home furnishings retailer is investing in its store estate and improving its digital growth prospects, and could increase its margins through introducing additional private labels.

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Store changes

The company is investing in its store estate in order to create a more visually appealing shopping environment for its customers. Changes it is making include the installation of queue lines at its checkouts to display higher-margin impulse items, as well as improved customer-facing technology enhancements in its stores that could increase customer engagement rates and lead to cross-selling opportunities.

In addition, Bed, Bath & Beyond expects to close 60 stores in fiscal 2019, according to its second quarter update. This should increase the profitability of its remaining portfolio of stores and allow it to focus its resources on stores that have greater long-term sales growth potential.

Digital growth prospects

The retailer is making wholesale changes to its website and mobile app in order to simplify the online shopping experience of its customers. For example, it is improving the search and recommendations functionality of its website and mobile app. It is also adding new features such as estimated delivery dates within the product pages for items across its inventory. This could boost the company's customer conversion rates.

The company plans to offer a 'buy online, pickup in store' service in order to offer greater convenience and flexibility to its customers. Currently, its website and mobile app only allow its customers to reserve online and collect in store. In addition, it is in the process of installing curbside pickup and lockers in its stores. They contributed to a rise in its mobile app sales of 90% in the second quarter.

Private label opportunity

Bed, Bath & Beyond is in the process of launching two additional private label decorative home furnishing brands. This is part of its plan to introduce six in-house brands during fiscal years 2019 and 2020 as part of its pivot towards direct import and direct sourcing practices.

It plans to increase the proportion of its products that are private label, which could differentiate its offerings from those of sector peers. It may also lead to higher margins as a result of the lower costs that private label brands entail.

Potential threats

The company's financial performance in the second quarter was disappointing. Its net sales decreased 7.3% versus the second quarter of the previous year. It also faces continued uncertainty as a result of weak consumer sentiment, with the Conference Board's September consumer confidence index reading being its lowest level since the start of 2019. Alongside this, the company expects the impact of incremental tariffs on its fiscal 2019 earnings per share to be up to $0.10. This could lead to weak investor sentiment towards the stock over the near term.

In response, Bed, Bath & Beyond has sought to reduce its costs in order to become more efficient. For example, it has completed a 7% reduction in the size of its workforce and changed its organizational structure to increase productivity. It is currently outsourcing a variety of transaction processing functions that will further reduce its headcount. This could lead to a drop in its annualized costs of over $50m in the long run.

Additionally, the business is negotiating with its vendor partners to reduce the potential impact of tariffs. The majority of its products are sourced domestically, which could reduce the effect of incremental tariffs on the company compared to its industry peers.

Outlook

Analysts forecast that the company will deliver an increase in its earnings per share of 5% in fiscal 2021. Its forward price-earnings ratio of 5.5 suggests that it offers good value for money based on its improving strategy.

Disclosure: The author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.