That is a danger Bed Bath & Beyond BBBY 0.66 % faces. The retailer has been beefing up its so-called omnichannel strategy, selling across the web, in stores and on mobile. It plans to invest heavily in projects such as analyzing purchasing data, a new point-of-sale system and improvements to its website and mobile app.
For a company that got only about 8% of sales online in the second quarter, but which competes directly with Amazon on many items, such upgrades are long overdue. But the effort may weigh on margins already under pressure.
Online margins tend to be lower than those in brick-and-mortar stores because of free shipping and fulfillment costs. The key is to trim other fixed costs. For many, that translates into selectively closing physical stores, notes Anthony Chukumba, a retail analyst with BB&T Capital Markets.
After all, the overall retail pie isn’t growing quickly. Retail sales, as measured by the Commerce Department’s broad measure of department-store and department-store-like sales, rose by only about 2% in the 12 months ended August.
Yet Bed Bath has doubled down on bricks and mortar in recent years. In mid-2012 it acquired Cost Plus, which then had 258 stores. At the end of fiscal 2015, Bed Bath had 1,513 stores, up nearly 30% from fiscal 2012.
That two-front expansion appears to be having a mixed effect: Digital sales climbed 25% in the second quarter, while comparable in-store sales declined by about 1%. On a blended basis, comparable-store sales rose 0.7% as square footage increased by 1.2%.
Pier 1 Imports PIR -1.30 % illustrates the risks. The home-furnishings retailer launched its e-commerce initiative in July 2012. Its heavy investments quickly ramped up online sales to 17% of total sales in the quarter ended August 2015 from virtually nothing at launch.
But Pier 1 didn’t appear to anticipate the wider impact. The retailer opened 22 new stores during the same fiscal year as its heavy site investment. By the close of the fiscal year ended February 2015, Pier 1’s operating margins had tumbled to 6.8% versus 11.7% in 2013. Pier 1 plans to close 20 to 25 stores this fiscal year.
Williams-Sonoma, WSM 1.27 % which gets about 50% of sales online, took a different tack. It first began selling online in 1999. In 2009, Williams-Sonoma announced a plan to reduce fixed costs, including layoffs and the closure of a major call center and a major distribution facility.
It also began reducing square-footage growth by strategically allowing leases to expire. At the end of fiscal 2008, the company had 563 stores for three core concepts—Williams-Sonoma, Pottery Barn and Pottery Barn Kids, according to Mr. Chukumba. By the end of its fiscal 2013, that had fallen to 523. Operating margins, meanwhile, have climbed to 10.7% in the fiscal year ended January 2015 from 8% in fiscal 2008.
At Bed Bath, margins have been going the other way. Operating margins were 13.1% in fiscal 2015, down from 16.5% in fiscal 2012.
And that has weighed on its stock. Bed Bath shares have fallen 24% this year and trade at 10.8 times forward earnings, well below a five-year average of 13.4 times.
Unless it starts to trim brick-and-mortar costs, Bed Bath investors may find online efforts only bring more pain.
Write to Miriam Gottfried at [email protected]