Bed Bath & Beyond Investors Can Relax

by Daniel Putnam | February 21, 2012 10:55 am

Morgan Stanley analyst David Gober made a splash last week when he said that Amazon’s (NASDAQ:AMZN[1]) latest ventures are likely to pressure certain brick-and-mortar retailers, such as Best Buy (NYSE:BBY[2]) and Bed Bath & Beyond (NASDAQ:BBBY[3]). The tendency of consumers to use Best Buy as an “Amazon showroom” is well known, but is that same trend really a threat for Bed Bath & Beyond?

The issue at hand is the growing family of websites under Amazon’s Quidsi division — which proclaims itself “one of the fastest growing e-commerce companies in the country.” Since its 2010 purchase of Quidsi — founder of the Diapers.com and Soap.com websites — Amazon since launched wag.com (pets), yoyo.com (toys) and, this past Wednesday, the home goods site casa.com[4], all under the Quidsi name.

According to rumors that were widely reported last week, a sporting goods site also will be on the way before the end of the year.

For those wondering, quidsi is Latin for “What if?”

Why would the fledgling casa.com site be a threat to BBBY? The primary reason is convenience. Casa.com, which has 35,000 products for sale, is linked together with the other four Quidsi sites in a streamlined, easy-to-use format. Shipping is free for orders over $49, and most items will be delivered within two days. Shoppers can’t expect major bargains, as prices across the site are in line to moderately competitive with what’s available elsewhere. Instead, the goal is create a more convenient shopping experience for the target demographic — moms — by gradually building a one-stop site to address the various needs around the home.

According to Gober, Amazon’s entrance into this market space creates a competitive threat for Bed Bath & Beyond. One source of support for this assertion is a Morgan Stanley (NYSE:MS[5]) survey showing that consumers see value in buying home goods online. Maybe so, but let’s not forget that BBBY has used its merchandising prowess to thrive despite its wares being readily available at the stores of numerous larger competitors, most notably Wal-Mart (NYSE:WMT[6]) and Target (NYSE:TGT[7]). In many cases, these competitors are located within the same shopping complex where Bed Bath & Beyond operates.

It would therefore appear that any reaction to the looming threat of rising online competition — even from Amazon — is exaggerated. After all, many of BBBY’s products are items that consumers want to see in person to make sure they match a particular color scheme. In contrast, the type of commoditized technology product sold by Best Buy has specs that more easily lend themselves to online comparisons. It therefore appears to be a leap to put Bed Bath & Beyond and Best Buy into the same category.

It also should be noted that PetSmart (NASDAQ:PETM[8]) hasn’t missed a beat since the 2010 debut of wag.com. While PETM stock initially traded down on the news of its new competitor, it gained over 30% last year and it has tacked on another 7.3% so far in 2012. One reason: In-store services and a positive shopping experience have kept customers coming back.

For now, the fundamental story at Bed Bath & Beyond remains sound, and the burden of proof is on casa.com to establish itself as a legitimate competitor that can pressure BBBY’s margins. Analysts are looking for growth of nearly 14% in 2013, and estimates for both 2012 and 2013 have risen in the past 90 days. BBBY’s valuation — 13.4 times forward earnings — isn’t especially onerous, particularly in light of the fact that the company is debt-free and the cash on its balance sheet accounts for more than 10% of its market cap.


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The real concern for Bed Bath & Beyond shares right now is the chart. At a time when so many stocks are at or near 52-week highs, BBBY has failed near the $64 level four times, and it is hanging just 2.4% above its 200-day moving average. If the broader market experiences a few down days, the stock is vulnerable to an air pocket that could see it trade into the $50-$55 range from Friday’s close of $59.47.

If this occurs, consider it a buying opportunity rather than a sign that Amazon’s tentacles are beginning to put the squeeze on another victim.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

Endnotes:

  1. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  2. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  3. BBBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBBY
  4. casa.com: http://www.casa.com
  5. MS: http://studio-5.financialcontent.com/investplace/quote?Symbol=MS
  6. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  7. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  8. PETM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PETM

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