EUR 850.00 For Business Accounts Only

Morningstar | Gross margin declines confirm lack of pricing power at Bed Bath, supporting our no-moat rating.

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 competitive, leading the company to experience a higher number of coupon redemptions in 24 out of 26 quarters, with 21 of those periods also experiencing rising average coupon amounts. With ongoing pricing pressure and secularly slower footfall expected across the brick-and-mortar landscape, positive comp performance could remain elusive, 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. This should pressure operating margins, leading to structurally lower results than in the past.While we have operating margins remaining depressed relative to historical levels (averaging around 4% over our forecast versus an 11% average over the past five years), we expect free cash flow generation to remain positive ahead, but falling to 1% of revenue (from 7% over the past decade), providing some impetus for continued dividend payout increases. We think Bed Bath can continue to return capital to shareholders despite capital expenditures that should remain above 3% of sales, as it attempts to keep up with evolving consumer demands.