Is Home Depot's Decor Push Where Bed Bath & Beyond Finally Unravels?

What did Bed Bath & Beyond (NASDAQ: BBBY) think would happen when it converted its bricks-and-mortar stores into online window shopping opportunities?

By stressing the sale of "deep value" products and "treasure hunt" items over products consumers actually come to its stores to buy -- while also using its stores as display areas for stuff customers can buy online -- the home goods retailer has seen same-store sales tumble. While e-commerce revenue is increasing, it hasn't been enough to offset the declines in physical stores yet.

Going forward, those online operations will face new competition from The Home Depot (NYSE: HD), which has completed its acquisition of direct-to-consumer home goods retailer The Company Store. Home Depot is now making a pitch for its customers to shop the site.

A credible threat

Forbes notes that earlier this month, Home Depot sent out emails to customers highlighting new products available for purchase online, in categories including furniture, bedding and bath, and small appliances.

How many of these products will eventually be displayed in Home Depot stores isn't known yet. But regardless of whether the DIY center erects in-store displays and signage that encourage customers buying a refrigerator to also consider curtains for the kitchen windows, it represents a direct challenge to Bed Bath & Beyond.

Last year, when Home Depot announced the acquisition, analysts at Credit Suisse pointed to The Company Store's customer demographics, which have a "heavier skew to females, higher income and older, overall most comparable to Bed Bath & Beyond."

Because Bed Bath & Beyond is focusing so much on its digital efforts, it needs to contend with Home Depot also being a formidable e-commerce competitor. (eMarketer pegs it as the fourth largest e-commerce site.) Home Depot reported that online sales accounted for 6.7% of its $100.9 billion in annual revenue last year, up 21.5% from 2016. Perhaps just as importantly, 60% of all Home Depot sales are influenced by customers visiting its website first.

No guarantees, though

Buying The Company Store isn't a slam-dunk move, as Home Depot hasn't exactly made a name for itself with fashion accessories. It's more of a place contractors go to get their jobs done. Pushing soft goods in a warehouse setting amid an industrial environment is a bit incongruous.

Home Depot has experimented with fashionable home decor before through its Expo stores, which it subsequently closed. The Company Store appeals to the same customer demographic. So, while cross-pollinating its stores with home furnishings is an interesting idea, there's no assurance it will resonate with customers.

In contrast, rival Lowe's has historically targeted homeowners, particularly women. As a result, fashion fixtures account for over $6.4 billion in annual sales at Lowe's, or 9% of the total. At Home Depot, decor represents just 3% of sales, or $3 billion.

The Company Store is only bringing with it about $23 million in annual sales, so initially, it's not going to tip the scales toward Home Depot in any appreciable fashion. Nevertheless, this could be the spot where the wheels come off for Bed Bath & Beyond.

It eschewed investments in e-commerce for years, and has been playing catch-up in a big way ever since. Now the pendulum has swung in the opposite direction, and Bed Bath & Beyond is focusing almost all of its energy on driving traffic to its website. Bed Bath & Beyond may be a little too successful in that regard, as customers seem to be avoiding its stores.

The retailer has described its current strategy as "show more, carry less." (It is stocking the most popular products in stores while displaying others that customers can find online.) Bed Bath & Beyond was already suffering from falling same-store sales due to the difficult retail climate, and its new plan isn't necessarily creating incentives for customers to visit its stores. It remains to be seen whether it can execute this strategy successfully.

The key takeaway

The problem is that Bed Bath & Beyond's stores are already crowded and difficult to shop. Adding more products that customers have to hunt for -- whether in-store or online -- might not have the desired effect. The big risk is that as Bed Bath & Beyond tries to drive customers to the internet, some may decide to listen, but end up shopping at the same place where they're spending money to fix up their house.

In any case, more competition targeted at its core demographic is not what it needs, so this could be a story that doesn't end well for Bed Bath & Beyond.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool is short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.