Markets

Private Brands Alone Can't Save Bed Bath & Beyond

Shares of Bed Bath & Beyond (NASDAQ: BBBY) surged 62% on Wednesday. While a broader rally in so-called meme stocks contributed to this huge jump, investors also reacted positively to the company's announcement that its plan to launch six new private brands in six months was ahead of schedule.

Bed Bath & Beyond stock pulled back sharply on Thursday as the meme stock rally faded. Nevertheless, shares of the home furnishings giant ended the week with a solid 13% gain. Yet Bed Bath & Beyond's private brand launches won't fix the company's main problem: sagging traffic. As a result, long-term investors should continue to avoid the stock.

BBBY Chart

Bed Bath & Beyond stock performance, data by YCharts.

Ahead of schedule

On Wednesday morning, Bed Bath & Beyond announced that it will launch three new owned brands by mid-July. These include a new kitchen and dining collection, a line of storage and organization items, and what it describes as a "youthful, eclectic collection of stylish and free-spirited pieces for the home."

With these brand launches, Bed Bath & Beyond will have added six new private brands in the span of five months: one month ahead of schedule. Importantly, the accelerated timing means that all six new private brands will be available ahead of the key back-to-school/back-to-college shopping season.

Bed Bath & Beyond CEO Mark Tritton knows the importance of private brands. Prior to taking the helm at the home furnishings retailer, he spent three and a half years as chief merchant at Target (NYSE: TGT), where he helped revive the cheap-chic giant's private brand prowess. Private brands enable a retailer to offer unique products -- providing differentiation from rivals -- at lower prices than national brands.

Thus, Bed Bath & Beyond's move to beef up its private-label offerings is smart. (Last month's new private brand, Simply Essential, could be the biggest difference-maker, as it allows Bed Bath & Beyond to cover lower price points to compete better with discounters.) But the private-label initiative only represents a partial solution to the company's woes.

A person cooking at a stove, with kitchen utensils hanging in the background.

Image source: Bed Bath & Beyond.

Will consumers notice?

Unfortunately for Tritton, Bed Bath & Beyond differs in a big way from his former employer: traffic. Bed Bath & Beyond's guidance for this year implies that a typical store will likely do about $6 million of sales. That's after the company shrank its store count by a third by closing underperforming stores and selling its non-core retail banners.

By contrast, Target stores averaged sales of $40 million last year. Last quarter, comparable in-store sales surged 18%. While growth will likely taper off in the quarters ahead, the average sales volume for Target stores could reach roughly $45 million in fiscal 2021.

In short, a typical Target store sees dramatically more foot traffic than a Bed Bath & Beyond. Of course, many of those customers are just there to pick up food and other essentials. But in most stores, Target strategically positions its apparel and home departments so customers have to walk by them to get to the everyday staples. This allows it to highlight new private brands -- and perhaps drive impulse purchases.

Part of the kitchen section of a Target store.

Image source: Target.

Bed Bath & Beyond doesn't have the luxury of a huge captive audience of shoppers walking through its stores every day. Indeed, it has lost so much store traffic and market share over the past five years that it will have trouble reaching potential customers and convincing them to try its new private brand offerings.

A tough turnaround project

As of mid-April, Bed Bath & Beyond estimated that it would generate $8 billion to $8.2 billion of revenue in fiscal 2021: up from $7.9 billion last year but down from $9 billion in fiscal 2019 (excluding the results of divested businesses).

Given the recent strength of demand for home-related items, the retailer may be able to beat that guidance. Nevertheless, its market share losses will continue. For example, Target's home department sales surged more than 30% year over year last quarter and grew more than 40% over the first quarter of fiscal 2019. Many other discounters have logged similar growth in the home category. Meanwhile, Wayfair's domestic sales grew 53% in 2020 and jumped another 43% in Q1 2021.

Sooner or later, consumers will pare back home-related spending, either due to budget constraints or changing spending priorities. If Bed Bath & Beyond can't grow during a period of abundant demand in its core market, it will struggle mightily once demand normalizes.

Unless Bed Bath & Beyond manages to stabilize its market share, long-term investors shouldn't buy into the turnaround hype surrounding this retail icon.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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