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A BBB Christmas in June

Union, NJ — Bed Bath & Beyond's acquisition late last week of Christmas Tree Shops has piqued the curiosity of the industry and investment community, prompting rampant speculation.

"Why?" was probably the most often posed question following the announcement late Thursday. But the questions didn't stop there.

Where does it fit into Bed Bath's long-term growth plans?

Will it roll out as a free-standing chain, as it has until now, or work its way into the merchandise bays at Bed Bath's stores, à la Harmon stores, last year's HBA acquisition? Or will it be some combination?

For their part, Bed Bath & Beyond executives did little to demystify their vision. Company president and ceo Steven Temares said, in a prepared statement: "Christmas Tree Shops' product mix is compelling and extremely well-priced, with a significant portion of their merchandise represented by self-developed or opportunistic buys."

No further comment was forthcoming.

But the speculation, particularly from analysts, was fascinating in its own right.

Based in Yarmouth, MA, at the shoulder of Cape Cod, Christmas Tree Shops is a 23-store, six-state seasonal specialty retailer that produced $370 million in sales last year. The current store prototype is about 50,000 square feet. The chain sells broad assortments of home décor, giftware, housewares, and paper goods, as well as seasonal.

Lehman Bros. analyst Alan Rifkin reported that the merchant has 860,000 square feet of retail space, an estimate that would produce about $430 per square foot in sales, against BBB's approximate $230 a foot productivity.

"We believe there is a greater likelihood that with the Harmon store acquisition, that BBBY rolls out the Christmas Tree Shops chain after a test period," he wrote.

But Rifkin also worried aloud that the chain would help obscure the real results at the Bed Bath core operation.

"Assessing the health of revenues and profitability at both chains will become more difficult in our opinion," he wrote, adding, "The acquisition comes at a time in our opinion when it is more important than ever to monitor the growth at the core BBBY chain, particularly new stores. We no longer have this level of detail."

However, that may play into Bed Bath's competitive posture.

"Harmon was more of a merchandising initiative, so they could test consumables in their stores," but this acquisition is "more of a growth leg," offered Joan Storms, an analyst for Wedbush Morgan Securities, Los Angeles.

"You can't walk out of there without buying more than one thing," she said, noting that the stores are highly productive.

Aram Rubinson at Banc of America Securities warned investors to hang on.

"Investors in BBBY may well need to get used to these types of transactions as we suspect more are on the horizon," he wrote in a morning-after brief. "Investors will also need to make a decision as to whether or not they are willing to accompany BBBY on a new journey."

He acknowledged that while other retailers have diversified into disaster, Bed Bath is "building its businesses from a position of strength, not weakness."

"But by ponying up $200 million, it is clear that Tree is far more than a merchandise initiative or a sourcing consultant," he added in the note.

Still, investors were taking their time digesting the news on Friday. In mid-afternoon trading, BBB's stock had fallen nearly 4 percent.

"Some will look favorably upon the acquisition as a solution to moderated top line growth," Rubinson wrote. "Others will view it as an accident waiting to happen."

Also reported by Andrea Lillo.

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