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Analysis: Too many of Bed Bath & Beyond stores are a mess

The one seemingly good piece of news coming out of Bed Bath & Beyond's latest results is that total sales rose by 5.2%. However, this success is blunted by the fact that this year the quarter contained an additional week of trade.

When this is taken into account, and when other metrics are assessed, there is no getting around the fact that trading at Bed Bath & Beyond is poor. Comparable sales remain in negative territory, meaning that they have now been on the slide for a full year. The excuse of a tough prior period cannot be used, as in Q4 of 2017 same-store numbers rose by a mediocre 0.4%.

Worryingly, despite the extra week of trade, the company is still posting reduced profits. At net income level, some of this is down to tax adjustments. However, that mitigation cannot be used to explain away the declines in gross and operating profit which fell by 0.7% and 21.6% respectively.

All of this comes despite the fact that the retail market in general and the home category, in particular, have been performing well. The blunt truth is that Bed Bath & Beyond simply hasn't been up to the job of converting this momentum into commercial success. In our view, there are at least a couple of reasons for this.

The first is poor operational standards. Too many of Bed Bath & Beyond's stores -- especially older ones -- are a mess. They are a hodge-podge of product, tightly crammed into a space that is largely devoid of inspiration. This makes them hard and sometimes unpleasant to shop.

As much as Bed Bath & Beyond might think that such an approach creates the excitement of a treasure hunt, the evidence shows this is not the case. Many customers come into Bed Bath & Beyond on a mission with particular products in mind. This means their shopping approach is focused, rather than leisurely or curious. Unfortunately, stores do not facilitate this. Nor do they stimulate or encourage such mission-based shoppers to casually browse and make impulse purchases.

The second issue is service which, in some locations, leaves a lot to be desired. At peak times, lines can be long, and it can be hard to find associates to assist on the shop-floor. Our own customer data shows that this area of dissatisfaction has been steadily increasing, and we believe it is starting to lose Bed Bath & Beyond sales. It is also pushing some shoppers online, which is not a bad thing per se, but it does have economic ramifications.

The imbalance in BBB's growth, with digital outpacing physical, has created pressure on the bottom line. Online sales, which have grown strongly, are less profitable due to higher shipping costs -- a dynamic that has not been helped by BBB's generous free shipping threshold. Meanwhile, store-based sales declines have reduced the productivity and profitability of the brick and mortar operation.

Profit is also affected by Bed Bath & Beyond's discounting and its rather slapdash approach to coupons and vouchers. As much as we recognize this has played an important historical role in the company's success, we also believe that its dependence upon it is now a symptom of a rather poor retail strategy and questionable execution.

We recognize that the company is making progress with newer stores and that it is pushing services like wedding lists. However, it needs to improve operational discipline and execution if it is to turn the tide of poor performance.
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