This Stock Is a Sleeper

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bed Bath & Beyond (NASDAQ: BBBY) has outperformed Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) year to date, as well as over a three-year time frame. It also managed to grow during the height of The Great Recession. This is a testament to its quality management and strong brand. While future prospects for the company are much brighter than the average retailer, there are a few things you should watch out for. 

Expansion

Bed Bath & Beyond currently owns and operates approximately 1,100 stores in North America. Bed Bath & Beyond aims to increase this number to 1,300 stores. Considering the company’s recent successes and stellar balance sheet, this type of expansion makes sense. It’s not too big, meaning it should be manageable.

Online traffic

Bed Bath & Beyond is trying to increase its online presence. Help is required in this area considering numbers provided by Alexa.com.

Over the past three months for bedbathandbeyond.com, pageviews-per-user declined 7.51%, time-on-site dropped 4%, and searches (often indicates first-time shoppers) plummeted 13%. Another negative is that the most overrepresented age demographic is 65+. If Bed Bath & Beyond wants to see continued long-term growth, it needs to target a younger age demographic. On the other hand, it might not matter (see below). 

Bed Bath & Beyond recently acquired Cost Plus World Market and Linen Holdings, which has helped drive top-line growth. Online traffic for worldmarket.com has been steady, and the most overrepresented age demographic is 25-34. This fact proves Bed Bath & Beyond made a smart acquisition as it allows the company to target different age groups.

Concerns

Placed, an analytics provider, ran an interesting study earlier this year. The study, titled, “Aisle to Amazon” aimed to indicate which physical retailers were most susceptible to Amazon. After studying 15,000 consumers, the study showed that Bed Bath & Beyond was the most vulnerable retailer to Amazon. This was based on how many shoppers visited Bed Bath & Beyond just to price-shop and then bought their product(s) at Amazon.

Another concern is rising interest rates. The 30-year fixed mortgage rate now stands at 4.51%, and it’s only going to move up. A 4.51% rate won’t impact homebuyers, but as this number approaches 6%, there will likely be a slowdown in home buying. This, of course, would be bad news for Bed Bath & Beyond as it’s a place where new homeowners like to shop.

A third concern relates to increased promotions, higher markdowns, and growing operating costs. And while they're fairly generic for retailers, these trends might affect margins going forward.

Bed Bath & Beyond vs. peers

Bed Bath & Beyond has seen consistent revenue and earnings increases and it always delivers profits. There might not be a dividend, but this can be looked as a positive as it allows the balance sheet to remain impeccable, and it provides for more capital for expansion plans. It should also be noted that growth has been possible without debt -- a very good sign.

Part of the reason this company is able to perform so well in a difficult environment is because it offers different price points for its merchandise, depending on the quality of that item. This draws different types of consumers to its stores. 

Wal-Mart might not seem like a major threat to Bed Bath & Beyond, but it threatens every retailer on the planet. Wal-Mart’s low prices attract hordes of value-focused consumers. The quality of its products might not be as good as its peers, but fewer consumers are looking for top quality in today’s economic environment.

Wal-Mart consistently increases its revenue and earnings, and debt management is good, which allows for a 2.40% yield. Wal-Mart might steal some market share from Bed Bath & Beyond, but it should not be the primary cause for its demise.

Target is somewhere in the middle. Its products aren’t as high quality as what you might find at Bed Bath & Beyond, and it’s prices aren’t as low as Wal-Mart, but checkout lines are incredibly fast, the atmosphere is clean, and generally goes after the same type of customer as Bed Bath & Beyond.

Target has also seen continuous revenue and earnings growth through the years, and like Wal-Mart, it yields 2.40%. The good news for Bed Bath & Beyond is that Target hasn’t been performing well in its home goods segment. Overall, Target will do just fine thanks to strong performances in other segments, but many feel Target is more of a real estate play.  And that's because it owns a good chunk of its properties.

Conclusion

Since Wal-Mart doesn’t offer top quality home goods, and considering Target isn’t performing well in home goods, it would seem as though Amazon is the biggest threat. And while that might be true, there will always be a need for a brick and mortar retailer of home goods.

Many people like to see what they're buying for their home, prior to purchasing it. That being the case, there is no real direct threat to Bed Bath & Beyond. It's highly specialized and serves a niche. Overall, Bed Bath & Beyond looks to be a decent long-term investment.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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