Bed, Bath & Beyond Multiplies Opportunity Through Diversification

Bed, Bath & Beyond posted earning per share of 34 cents in the fiscal first quarter, beating the 30 cents per share it posted in last year’s period and analyst estimates, which positions the company to continue investing in a diversification strategy that today even includes the test of an in-store natural products operation offering health and beauty aids and grocery items.

In a conference call this week, Bed, Bath & Beyond executives emphasized that the company will build its business cautiously in the current economic environment, and it was willing to suffer a 1.6 percent first quarter decline in comparable store sales, scaling back advertising among other expenses, to help boost profits. At the same time, the company continues to self-finance new store additions to its infant and toddler format, buybuy BABY, its seasonal and low-price housewares chain Christmas Tree Shops and its health & beauty aids concept Harmon Face Values. More importantly, it is capitalizing on its assets internally, introducing Harmon sections to more Bed, Bath & Beyond, Christmas Tree Shops and buybuy BABY locations. The company also continues to add fine china departments in its Bed, Bath & Beyond stores, launch new merchandising initiatives, remodel stores, enhance its web site and expand its bridal, baby and gift registries to draw new customers and, critically, coax existing customers to spend more across its operations.

By the end of fiscal 2009, the company plans to open 57 stores in total with 35 Bed, Bath & Beyond units, seven Christmas Tree Shops, 12 buybuy BABY locations and three Harmons, a total that is more conservative than but not far out of line with its pre-recession growth pace of about 80 stores a year. “This reflects our continued prudent approach to growth in the current macroeconomic environment,” Warren Eisenberg, the company’s co-chairman said.

Bed, Bath & Beyond diversification also is geographic and one of the new namesake store openings was recently accomplished in Canada, bringing the company’s store total there to six. It also operates a two-store joint venture in Mexico dubbed Home & More. The company believes it can open an additional 400 Bed, Bath & Beyond stores in the U.S and Canada, and further has stated as its goal to become the dominant home furnishings retailer in each of the countries where it competes.

But for the moment, diversification within the store base is probably the most important element of Bed, Bath & Beyond’s growth strategy. Acquired just a few years ago, Harmon has not only contributed new stores to the enterprise but health and beauty sections that have become a fixture in a growing number of Bed, Bath and Beyonds. The Harmon section expansion is part of a strategy to share best practices among the chains the company operates. Like Harmon, Christmas Tree Shops and buybuy BABY are operations that Bed, Bath & Beyond has acquired over the past decade and that have contributed to both new store growth and the development of fresh operating practices.

The company is testing Verdi Market, a new natural products shop that includes home furnishings, health and beauty aids and food, at a Bed, Bath & Beyond in Manhattan. Natural food may seem a departure, but Bed, Bath & Beyond stores have been carrying gourmet grocery products for some time. The selection has been, for the most part, complementary to home furnishing products it sells, though, so in addition to chip bowls and blenders, Bed, Bath & Beyond stores offer salsa and drink mixes.

Argus analyst Christopher Graja, pointed out in a research note that Verdi Market probably won’t have a place in all Bed, Bath & Beyonds, but could suit specific namesake stores and Christmas Tree Shops. He stated:

We think the broad logic for testing Verdi Market is very similar to the rationale for the Harmon departments that are appearing in more and more — but still less than half — of the company’s stores. We think that Bed, Bath & Beyond would like to expand its business with existing shoppers. In addition, we believe that the company’s core home-furnishings shoppers are also major consumers of health and beauty products. In fact, they may spend more on health and beauty merchandise than on home furnishings. We believe that the presence of a Verdi Market could be a reason for shoppers to visit Bed Bath more often.