Why Bed Bath & Beyond's Plan to Boost Profits Could Backfire

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Shares of retailer Bed Bath & Beyond (NASDAQ: BBBY) have been decimated over the past few years. The stock is down nearly 80% from its multiyear peak, the result of sluggish growth and tumbling profits. The company produced net income of $275 million in 2018, excluding a large asset impairment charge, down from over $1 billion in 2013.

Bed Bath & Beyond has managed to keep sales growing until recently, partly by sending customers reams of coupons. The brand has become associated with the iconic 20%-off coupon that seems to come in the mail way more often than it's needed.

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That coupon strategy isn't working anymore. Comparable sales fell 1.1% in 2018, with a mid-single-digit decline from stores being partially offset by digital sales growth. The company plans to focus on shoring up the bottom line in the near term, while attempting to return to revenue growth in the mid-to-long term. Cutting back on coupons is a priority.

Why reducing coupons could backfire

Bed Bath & Beyond isn't going to quit coupons cold turkey, but it is going to try and reduce how much it depends on them. "We also continue to optimize our coupon strategy through coupon exclusions, adjusting our value offers, and limiting coupon availability," said Bed Bath & Beyond CEO Steven Temares during the fourth-quarter earnings call.

Temares admits that dialing back coupons is going to hurt sales, but he sees it as the right move in the long run: "Of course, actions like these do have a near-term impact on sales, but they are -- they benefit our overall profitability."

Getting customers to use fewer coupons will certainly help product margins, but the company may be underestimating how entrenched these coupons have become. How many customers will stop shopping at Bed Bath & Beyond if coupons are no longer bountiful? At least in my experience, coupons are often necessary to bring the retailer's pricing to competitive levels.

We can get an idea of how customers react to significant changes in promotions by looking at men's clothing retailer Jos. A. Bank. Jos. A. Bank was acquired by Men's Wearhouse, now known as Tailored Brands (NYSE: TLRD), in 2014. The combined company eventually decided that Jos. A. Bank's signature buy-one-get-three promotional sales needed to come to an end.

Tailored Brands made that decision because it wanted to rebuild the Jos. A. Bank profit model, broaden customer appeal, and strengthen the margin profile. It was about boosting the bottom line, and the company expected the top line to suffer from some volatility.

What happened? Sales plummeted at Jos. A. Bank, with comparable sales down a whopping 16.3% in 2015. That includes a staggering 31.9% decline in the fourth quarter. "Our transition away from unsustainable promotions has proven significantly more difficult and expensive than we expected," said Tailored Brands CEO Doug Ewert at the time..

Things haven't improved much at Jos. A. Bank since then. Comparable sales declined another 9.5% in 2016, recovered a bit with 5.4% growth in 2017, then posted an anemic 1.4% uptick in 2018. Tailored Brands stock is down almost 90% from its post-acquisition high in 2015, with the stock falling by 50% in a single month when these problems first came to light.

Bed Bath & Beyond has built a business model that relies on coupons to drive store traffic and sales. Customers have come to expect coupons, and they will probably just shop somewhere else if they don't have them. If Tailored Brands' experience with Jos. A. Bank is any indication, Bed Bath & Beyond needs to tread very carefully as it moves away from coupons.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.