Specialty Stores Will Dominate The Next Decade
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Consumer habits and tastes change. Some changes are predictable, some are not. Some changes are short-lived fads, others are somewhat permanent. But when a consumer change in habits or tastes is both predictable and somewhat permanent, it is imperative that investors recognize this fact and invest (or not invest) accordingly!
Taking a close look at Bed Bath & Beyond (NASDAQ: BBBY) and its competitors confirms a compelling story that even the average shopper could easily predict: Specialty retailers will dominate the next decade.
Bed Bath & Beyond Outperforms Its Peers
Quite impressively, Bed Bath & Beyond posted positive revenue growth and earned solid returns on capital between 2007 and 2009, despite the recession. This is very interesting considering the steep decline in new home construction during this time. In fact, according to the U.S. Census Bureau, sales dropped by 20% in the home furnishings industry during this time. Bed Bath & Beyond's excellent strategy execution helped them outperform competitors and buck the trend.
But if the increased demand during this period was not from growing industry demand, where did it come from? Mostly from hurting department stores as consumers shopping habits change to prefer specialty retail over widely varied merchandise at traditional department stores.
JCP Revenue TTM data by YCharts
If you look closer at the 4 retailers in the chart above, the trend is clear: Specialty stores Bed Bath & Beyond, Kirkland's, and Pier 1 Imports are all outperforming JC Penney and Sears by a considerable amount. The consumer change is both predictable and more than a fad: Consumers prefer specialty retail stores over department stores.
In fact, based on many key profitability ratios, Bed Bath & Beyond and its specialty retail peers are clearly outperforming department stores with a wider variety of merchandise. Let's take a look at two key ratios that are important to every investor: Return on invested capital and return on assets.
BBBY Return on Invested Capital data by YCharts
BBBY Return on Assets data by YCharts
Once again the old-fashioned department store models (JC Penny, Sears) are lagging behind specialty retail--this time on profitability metrics.
The Bottom Line
Specialty retail stores are outperforming old-fashioned department stores. Consumer habits are changing and specialty retail will dominate the next decade. Bed Bath & Beyond and its specialized peers have benefited from this trend as they continue to steal market share from the department stores. This trend will likely continue and Bed Bath & Beyond is poised to benefit.
DanielSparks has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.
