Bed Bath & Beyond's $500 Million Acquisition
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Bed, Bath and Beyond (NASDAQ: BBBY) announced earlier this month that it will pay around $550 million to acquire its smaller competitor Cost Plus (NASDAQ: CPWM). The acquisition is meant to broaden BBBY’s product base, pushing it further from competitors including Pier 1 Imports (NYSE: PIR) and Williams-Sonoma (NYSE: WSM).
The two companies have a history together, with four Cost Plus stands opening inside BBBY stores since 2010. While Cost Plus does offer furniture and accessories, 40% of revenues come from specialty foods and consumables, which are featured in the BBBY stands.
The Cost (Plus) Advantage
Cost Plus operates 250 stores under the names Cost Plus World Market and Cost Plus Imports. The consumables that BBBY is after include exclusive brands and a wide variety of foreign brands difficult to find in the U.S. outside (often expensive) import stores. BBBY will presumably expand its in-store stands to offer a wider range of the food goods.
The $550 million price is reasonable for a company on a healthy rebound from the recession related slump that impacted all home furnishings companies. Cost Plus recently reported its first quarter and these were the highlights:
- Same store sales increase of 7.9%
- Same store customer count increased 2.7%, average ticket increased 5.0%
- Continuing operation net income of $129,000 compared to $3.0 million net loss, year-over-year. This was the first net gain since fiscal 2004.
- Net sales increase of 7.4% to $214.6 million.
The Competition
In store size, BBBY nears the ranks of Target and Wal-Mart, but belongs to the Home Furnishings Industry, where its primary competitors are Pier 1 Imports and Williams-Sonoma. BBBY has the lowest prices of the three, largely due to a wider range of stock. Even with the lower prices, and an average square footage over 70% larger than the others. BBBY falls in the middle when it comes to sales per square feet, with $264 compared to $169 for Pier 1 and $361 Williams-Sonoma.
BBBY is performing well but the Cost Plus purchase will help it further differentiate from the competitors. Pier 1 mostly earns through decorative accessories. Williams-Sonoma has specialty cookware (at its Williams-Sonoma stores) and furniture and accessories (Pottery Barn), while BBBY makes 60% of revenue from furniture. While Williams-Sonoma does offer limited food items, it pales in comparison to what Cost Plus can bring to BBBY’s table.
The Road Ahead
The Cost Plus acquisition will be funded with on-hand cash and should close in BBBYs second quarter. Results of the acquisition should begin appearing on BBBY’s 2012 financial reports, slightly bumping up per-share profits after costs.
Investor reactions have been mostly positive. When the acquisition was announced, Cost Plus shares rose 22% while BBBY increased 1.3%, closing out May 9 at $21.93 and $68.02, respectively. Cost Plus has held steady, closing May 25 at $21.99 while BBBY closed at $72.40.
It’s a low risk effort for BBBY, since the foundation was already in place. It will be interesting to see how Cost Plus products become further integrated into the BBBY stores and how that will translate into sales metrics.
LynBetz 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 and Williams-Sonoma. 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.
