By Arriana McLymore and Siddharth Cavale
NEW YORK (Reuters) - Struggling home goods retailer Bed Bath & Beyond Inc (NASDAQ:BBBY) is taking an axe to stores and jobs and overhauling its merchandising strategy, but its return to profitability anytime soon may hinge on luring U.S. shoppers who currently spend $18.2 billion a year on baby goods.
The company's buybuy Baby unit is the largest specialty baby-product retailer in the U.S., according to GlobalData. But other retailers – including Gap Inc (NYSE:GPS)'s Banana Republic and pharmacy retailer Rite Aid (NYSE:RAD) - are pushing baby goods, filling the void created by the 2017 bankruptcy of Babies 'R' Us parent Toys ‘R’ Us.
Holding onto buybuy Baby -- which Bed Bath & Beyond had put up for sale under shareholder pressure before reversing course in August -- helped the parent company obtain its recent $375 million loan, the maximum amount it could borrow, a person familiar with the matter said. Bed Bath & Beyond also held onto buybuy Baby because it believes it will continue growing, which could allow it to fetch a higher price later or at least modestly improve Bad Bath & Beyond's finances going forward, the source said.
While there are some similarities between buybuy Baby and Babies 'R' Us, which sold similar goods as part of the Toys 'R' Us company that eventually liquidated, there are key differences that could help lead to an eventual sale of buybuy Baby.
Bankers had examined selling Babies 'R' Us years ago, but found that separating it would be too complex because the chain predominantly operated in the same retail locations as Toys 'R' Us stores and they operated under a single lease at each location, a person familiar with both the Bed Bath & Beyond and Toys 'R' Us cases said.
In contrast, buybuy Baby for the most part operates at standalone retail locations, making an eventual sale of the chain far simpler, the source said.
But on the operating level, buybuy Baby faces challenges, especially in its focus on clothing. Baby food and formula are showing some of the strongest growth rates, with sales of baby feeding products jumping 15.2% and formula and nutritional beverage sales rising 8.7% in the year to July 30, NielsenIQ data showed.
At two New York City buybuy Baby stores recently, shoppers combed through racks stocked with Adidas (OTC:ADDYY) track suits for toddlers, Juicy Couture onesies, Calvin Klein apparel and Nike (NYSE:NKE) baby bags. But both stores offered few baby-food options.
That limitation "weakens the status of its stores as a one-stop shop for all baby needs," said Neil Saunders, managing director of GlobalData Retail, unlike Amazon.com (NASDAQ:AMZN) and mass merchants Walmart (NYSE:WMT) and Target (NYSE:TGT), which "sell all kinds of baby goods under one roof."
Still, the baby-gear chain is the parent company's “crown jewel," said David Klink, senior equity analyst at Huntington Private Bank.
Buybuy Baby had $1.4 billion in sales https://www.prnewswire.com/news-releases/bed-bath--beyond-inc-reports-fiscal-2021-fourth-quarter-results-ending-february-26th-2022-301524704.html in the latest fiscal year, ended Feb 26, 2022, or about 18% of Bed Bath & Beyond's total sales of $7.87 billion.
Bed Bath & Beyond does not provide profitability data for buybuy Baby, but does report some quarterly data on same-store sales. Buybuy Baby's comparable sales have been outperforming the Bed Bath & Beyond brand in recent quarters, although both brands posted declines in the 2022 fiscal first quarter ended in May, according to company statements.
Buybuy Baby was profitable at least until 2021, according to GlobalData, in contrast to its parent. Bed Bath & Beyond posted a $150 million loss for the fiscal year ended February 2021, and another net loss, of $559.6 million, for the year ended February 2022. Following growth in U.S. birth rates in 2021, the first rise in seven years, according to the Centers for Disease Control and Prevention's National Center for Health Statistics, the potential market for baby gear is enormous. Total spending on baby-care products in the U.S. jumped 8% in the 12 months through Aug. 27, according to NielsenIQ, which measures scanner activity at stores.
But keeping the buybuy Baby unit could be risky if its value erodes due to continued association with struggling parent Bed Bath & Beyond, which is saddled with $1.4 billion in debt.
Bed Bath & Beyond, once known to be a "category killer" in home goods, faces a critical holiday season when it must show its strategy to turn around its business is reversing sales losses and bringing customers back.