In the early days of the pandemic, when uncertainty loomed, the home took on a new meaning — an all-in-one venue for office, school, virtual happy hour and dining in.
To adjust to the new way of life and make the place they were spending the majority of their time more comfortable, consumers began investing more into their homes. This, in turn, gave a boost to retailers that sell products for the home — even those that were struggling just prior to the pandemic.
As demand across the sector rose, so did the benefits for home goods retailers, including boosted sales, more customers and, for some, profitability.
But as consumers felt more comfortable leaving their houses and some pre-pandemic activities like working from offices returned, spending started shifting away from the home to other areas, like experiences.
Retailers like Bed Bath & Beyond and Wayfair, which were uniquely positioned to benefit, are now facing declines as demand wanes. While year over year sales declines against a period of heightened demand was to be expected, did these retailers fully capitalize on the opportunity to right their businesses?
The problems Bed Bath & Beyond and Wayfair experienced pre-dated the pandemic.
For years, Bed Bath & Beyond faced a decline in sales, market share losses and drops in foot traffic. To the latter point, the retailer’s weekly foot traffic almost always fell 30% or more below the baseline between January 2017 and July 2019, according to a blog post from foot traffic analytics firm Placer.ai. Comparatively, weekly foot traffic at TJX-owned HomeGoods steadily increased during that period.
Bed Bath & Beyond had a value proposition issue with customers, which helped lead to the declines, Wedbush analyst Seth Basham said.
“Customers didn’t see a good reason to shop at stores or online because they could get the products elsewhere less expensively and more easily. So they lost a lot of traffic,” Basham said, adding that retailers like Amazon were better able to compete on price to attract consumers.
Wayfair, however, consistently struggled to turn a profit. Since 2014, when the company entered the public markets, Wayfair failed to report an annual net profit in every year but one: 2020.
In the fiscal year ended Dec. 31, 2019, the company reported a net loss of $985 million. Because Wayfair does business almost entirely online, the company has continued to shovel money into its advertising in an effort to acquire customers. In 2019, Wayfair spent $1.1 billion on advertising, which represented about 12% of total revenue.
“They were spending really aggressively for growth, investing in a number of different areas that were not likely to pay off in terms of driving growth anytime soon,” Basham said.
Capitalizing on demand
At the height of the pandemic, home retailers experienced an influx in demand.
“During the lockdown, everyone was stuck at home and focused on doing things at home, so there was a huge surge in demand for anything home related, particularly in the categories of cooking, and then bed and bath became huge categories as well over the ensuing period of post-lockdown,” Basham said. “That provided [home retailers] a lot of free customers and a lot bigger market to go after for a period of time.”
Across the sector, from small businesses to larger companies, home retailers saw more consumers actively seeking them out. A home furnishings and appliance retailer that Alvarez & Marsal’s managing director Mike Simoncic works with was faced with tremendous uncertainty in March of 2020.
“They were fearful that they’d be out of business. They cut all of their advertising going into Memorial Day because they didn’t think the consumer would be there,” he said. “The stimulus checks hit in April and May. They had their best year ever — they had their best Memorial Day ever without advertising. It just shows you that there was a surge and now we’re seeing an offset in the demand.”
Wayfair was in an even stronger position by selling in an in-demand category, but also by selling primarily online where consumers shifted spending in the early days of the pandemic. In the second quarter of 2020, Wayfair was able to narrow its advertising expenses as a percentage of total revenue to 9.7% from 11.1% the year prior. During that quarter, the company’s active customers reached 26 million, up 46% year over year.
The increase in customers — and revenue — led Wayfair to its first annual net income since becoming a public company.
By the end of 2020, Wayfair was able to move to a low default risk from a high default risk in 2019, according to data from RapidRatings. The firm tracks two key indicators into how companies are performing: the Financial Health Rating (FHR), which measures the likelihood of default in 12 months, and the Core Health Score (CHS), which measures the medium- to long-term sustainability and operational efficiency of a company. In both metrics, 100 is the best score and 0 is the worst score.
Bed Bath & Beyond and Wayfair have a high risk of default after seeing sales increase during the early days of the pandemic
The retailers’ Financial Health Ratings, representing default risk over the next 12 months
The period of heightened demand also gave companies, particularly mature retailers like Bed Bath & Beyond, an opportunity to reconnect with lapsed customers and introduce themselves to new ones. But it also offered retailers an opportunity to create greater efficiencies in their businesses so that they could “operate more profitably in a more normalized environment” once demand came down from peak levels seen during the early days of the pandemic, RapidRatings CEO James Gellert said, adding however that that opportunity was missed by several retailers, including Wayfair.
“If you can’t get your house in order during a time of peak business opportunity, it’s going to be really hard for you to do that in a more normal environment,” he said.
As vaccines have become widely available and the economy has largely re-opened, spending has started to shift away from the home recently.
While spending in the home furnishings sector in January still increased year over year, by 6%, growth is slowing, according to data from the Commerce Department. At the same time, spending in categories like apparel is ticking back up. Apparel sales saw a 24% year over year increase in January.
Macy’s, which heavily sells apparel, is experiencing “almost the inverse of Wayfair,” Gellert said. “You’ve got a diversification in a company like Macy’s where you can get the home goods and you can get the apparel and you can get a variety of other things. … Whereas the narrowly focused online home product sales are now taking a beating.”
Macy’s FHR and CHS in 2021 was 26, making it a high risk for default, according to RapidRatings. However, its most recent FHR and CHS as of December 2021 were 73 and 76, making it a low risk.
On the other hand, Wayfair’s most recent CHS was 31 and its FHR was 37, putting it back into the high-risk category.
Macy’s is now considered a low default risk after being deemed a high risk early in the pandemic
The retailers’ Financial Health Ratings, representing default risk over the next 12 months
“What we’ve been saying for a long time is that companies that couldn’t improve their underlying operational performance during COVID, are going to fall back to their prior financial status once things ease up. And Wayfair has a really good example of that,” Gellert said. “This is a classic example of a company that got a lot of boost and benefit during a concentrated period of time, but has not made operational improvements so they’re really reverting to their prior risk levels.”
Bed Bath & Beyond’s CHS now stands at 31 and its FHR is 38, similarly making it a high risk of default, according to RapidRatings. While the retailer was able to rebound from sales and traffic declines when stores temporarily closed in the spring of 2020, it still fell below 2019 figures.
“Their old problems are showing up even though they’ve tried to pivot pretty materially under the leadership of Mark Tritton,” Wedbush’s Basham said. “They did start getting more traffic back in their stores as consumers got more comfortable shopping in store again, but now they’re still seeing traffic declines, especially relative to the pre-pandemic period.”
Bed Bath & Beyond has introduced a number of initiatives over the past year, including remodeling stores, investing in its supply chain and overhauling its merchandise assortment. To the latter point, the retailer began weeding out underperforming brands and products and introducing several new private labels, with a goal of increasing private label penetration from 10% to 30%. But the unforeseen problem hindering the success of that strategy has been the industry-wide supply chain challenges leading to out-of-stocks.
”Hindsight is 2020,” Basham said. Bed Bath & Beyond “could’ve delayed some of their merchandise overhaul changes, the supply chain changes.”
Consumers shopping at Bed Bath & Beyond may have had up to seven choices in a single product category in the past, Basham said, but now the assortment has been narrowed to two or three with even fewer when you account for out-of-stock products, which has led the retailer to post market share losses recently.
“If I go to Bed Bath & Beyond and they don’t have the coffeemaker that I’m looking for, I’ll probably have ordered it on the way home instead of going to find it somewhere else. And I’ll probably have ordered it on Amazon or maybe I’ve ordered it from the manufacturer itself. So inventory is extremely important,” Gellert said. “The supply chain shortage has hurt a lot of the midsize and smaller retailers because the larger retailers have been able to use their capital and their buying power to have more sustained inventory.”
And because many products in the home space — like couches, tables and lamps, for example — don’t have the same brand affinity as a product selling in the apparel category, it meant consumers were even more willing to jump from one retailer to another if hit with an out-of-stock on a product they were looking for.
“I think one of the challenges that Wayfair has is they sell a lot of product that doesn’t, per se, have a unique brand differentiation, so they are somewhat commoditized,” Simoncic said. “If people are looking for certain furnishings — it could be anything from a certain end table to a bar cart — the consumer is going to shop multiple sites and pick the one thing that meets the visual demand. If Wayfair doesn’t have the right inventory, meaning the kind of designs that are flowing and selling, then they lose that business.”
As demand for home goods continues to decline from pandemic highs, both Wayfair and Bed Bath & Beyond are experiencing hits to their top and bottom lines. Wayfair in its most recent quarter reported net revenue fell 11.4% year over year, as it swung to a net loss from a profit a year ago. The company’s active customers also declined 12.5% from last year to 27.3 million. Bed Bath & Beyond in its third quarter reported net sales fell 28% from the prior year and 32% from 2019, while its net loss widened.
Wayfair’s and Bed Bath & Beyond’s declines came at a time when overall U.S. consumer spending in the sector increased by nearly 14% from the year-ago period, according to GlobalData research.
Bed Bath & Beyond in January also lowered its guidance for fiscal year 2021 “based on its year-to-date performance, as well as current expectations for the fiscal fourth quarter.” The company now expects net sales to be about $7.9 billion, down from previous estimates of $8.3 billion. Wayfair — which reported fiscal 2021 results in February, including a net revenue of $13.7 billion, down 3.1% year over year, and a net loss of $131 million from a profit last year — did not provide specific guidance for 2022.
Whether the efforts these retailers are making to improve their businesses is enough is “a big question mark,” to Basham, especially as spending continues to shift in the year ahead.