Bed Bath & Beyond, Pier 1 Need to Update Approaches
Bed Bath & Beyond (BBBY) reported uninspiring quarterly results on Wednesday, and Pier 1 Imports (PIR) didn't hold up a whole lot better a day later. We may be years into a housing boom that initially benefited these home-centric retailers, but challenges appear on the horizon.
Bed Bath & Beyond and Pier 1 faulted lousy winter weather for a slowdown during the holiday season, but there's more to the potentially problematic trend than just snowstorms here and there.
The Softer Side of Home Furnishings
Shares of Bed Bath & Beyond opened 6 percent lower on Thursday morning after issuing a troublesome quarterly report the night before.
It wasn't the slight dip in sales and earnings. The market was expecting that. After all, its fiscal fourth quarter ending on March 1 included one fewer week than the prior year's fiscal period. Comparable store sales (a metric that's more telling since it compares what the average store sold in similar 13 week cycles) increased 1.7 percent -- that's not too shabby in light of the rough weather that many retailers were complaining about.
But the stock still took a hit after the superstore chain offered up weak guidance. Bed Bath & Beyond sees sales and earnings clocking in below Wall Street targets for the current quarter.
Pier 1 had an even sloppier holiday quarter. It too saw sales and profitability decline with one less week in the fiscal period, but its comparable store sales plunged 4.6 percent during the period. Pier 1 blames the lousy weather and a holiday calendar shift a year earlier for the shortfall.
Pier 1 Imports is also updating its three-year growth plan. As a result of "the challenging fourth quarter," the retailer now sees it hitting its goal of achieving $225 in sales per retail square foot in fiscal 2016 instead of fiscal 2015. It also sees operating margins sliding to between 11 percent and 11.5 percent over its original goal of clocking in at 12 percent.
This may not seem like an outlandish tweak, but why should the timing of the holiday shopping season or a few brutal storms have any bearing on how sales and operating margins will play out in two years? You've been busted, Pier 1.
Hard Times for Bricks and Mortar
The housing recovery was great for these retailers. Folks were buying new homes, which often call for the personal touch of new shower curtains, linen sets and outdoor armchairs. As home prices increased, more homeowners were no longer underwater on their mortgages, freeing them to invest in their properties.
%VIRTUAL-article-sponsoredlinks%However, against this backdrop we're starting to see mortgage rates inch higher and home sales start to slow. We also can't dismiss the Internet. Bed Bath & Beyond and Pier 1 have active online storefronts, but they can't compete with Amazon.com (AMZN) and its cost advantage of not having to outfit hundreds of staffed showrooms across the country the way that Bed Bath & Beyond and Pier 1 do.
Some will argue that if your dog ruins your area rug or you run out of K-cups for your coffee maker that you'll need immediate replacements. But there are plenty of renters and homeowners who are fine waiting a couple of days for a cheaper solution. Pier 1 sees online sales accounting a tenth of its business in a couple of years, but that's not enough.
Both Bed Bath & Beyond and Pier 1 expect to grow their sales this new fiscal year, and that's encouraging. However, with the operating climate and trends working against them improvement in 2014 and beyond is no sure thing.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Bed Bath & Beyond. The Motley Fool owns shares of Amazon.com. Try any of our newsletter services free for 30 days.