EUR 850.00 For Business Accounts Only

Morningstar | Bed Bath & Beyond's Turnaround Continues to Idle With Flat Operating Margin Performance Set for 2019

Bed Bath & Beyond has struggled in recent years to capitalize on its historical strengths, including its merchandising strategy, the push to a wider omnichannel presence, untapped international growth opportunities, and widely recognized retail brands like the namesake Bed Bath & Beyond and Cost Plus concepts. No-moat Bed Bath has attempted to stay abreast of evolving consumer demand in a retailing industry that has become increasingly price competitive, which has lead the firm to experience a higher number of coupon redemptions in 24 out of 28 quarters, with 23 of those periods also experiencing rising coupon amounts. With ongoing pricing pressure and secularly slower footfall expected across the brick-and-mortar landscape, negative comp performance persists over our forecast, making cost leverage hard to capture.Mobile and web growth have been decent, but customer-led initiatives haven't taken hold at the pace we had hoped for, which has left brand equity to languish and market share to recede from prior levels, which we expect will persist. Merchandise initiatives to increase brand loyalty, including offering exclusive product, private label, and quality for value, make the customer brand relevant, and investments in point-of-sale and analytic programs will help to improve product positioning but are unlikely to drive meaningful improvement in comp or operating performance. Remaining successful will require investment that could be inflated to historical levels to keep the firm relevant and visible to protect market share degradation. This should still pressure operating margins, leading to structurally lower results than in the past.While we have operating margins falling to even more depressed levels than in recent periods (averaging around 3% over our forecast versus an 9% average over the past five years), we expect free cash flow generation to remain positive until 2027, averaging 1% of revenue (from 7% over the past decade), limiting dividend growth over the later years in our forecast. With capital expenditures that should remain above 3% of sales, share repurchases could similarly slow as the firm preserves cash, crimping earnings per share growth.