Bed Bath & Beyond: The Risks to Online Sales Growth

Last week, I wrote about Bed Bath & Beyond's 1Q15 results and about some concerns surrounding the company's guidance for the year. Specifically, I wrote that Bed Bath & Beyond may miss its top-line guidance due to difficult comparisons. In response, some have noted that online sales should account for that 2-3% growth; if one breaks out comps by online vs. retail, the company would only need brick and mortar to break even, as it did last quarter, and for online to contribute another 2-3% to comps. 

  • First, I would note that there are simply some concerns around comp guidance, but it is not the crux of the bear case. The bear case rests on declining profitability, which is supported by low-single digit comps (but does not rely on the company missing its comp guidance). Bed Bath & Beyond is seeing significant pressure on both their gross margin and their SG&A line items. While online sales are growing, it is not enough to leverage the investments, which is leading to further profitability declines. The jury is out on the exact point at which online sales become large enough to slow the margin bleeding.
  • Second, it is debatable how much online sales will contribute to the comp for the remainder of the year, and specifically in 2Q. Online sales are now 8% of total sales, and growth is beginning to decelerate (on a y/y basis) as it naturally becomes more difficult to grow on top of larger numbers.

Online growth remains strong at ~35%, but it has decelerated over the last year. Comparisons are comparisons; whether they come from the retail store or from its online sales does not eliminate the concern; it only shifts the concern to a more specific part of the business. In other words, its online sales will face more difficult comparisons in 2Q as 2Q14 clearly benefited from strong online sales growth (that were likely stronger than 1Q14). Even with sequential online growth, this could lead to a lower contribution to comps, since comps are calculated on a year-over-year basis.

Finally, I would reiterate that investing is a matter of weighing risks and rewards. My comment from the original post was to simply acknowledge that the risks to the comp guidance appear somewhat higher after 1Q results. However, it is an ongoing debate, and online sales growth is certainly one component of the bull thesis.