Bed Bath & Beyond: An Economic Indicator?

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Shoppers leave a Bed Bath & Beyond store in New York City

If you're looking for stuff that you don't really need or are a spouse intent on torturing your husband, just take a ride to Bed Bath & Beyond. After all, the home-furnishing retailer is famous for its selection of macho, must-have merchandise like sweet-smelling soaps, stainless-steel garbage cans and extra-fluffy towels. Like most home-furnishing retailers, Bed Bath & Beyond, a $7.2 billion company with more than 1,000 outlets nationwide, has stalled in the recession: same-store sales dropped 4.3% in the fourth quarter of the fiscal year ending in February, while earnings fell 18.2%.

Late last week, however, Bed Bath & Beyond announced results that actually exceeded the expectations of Wall Street analysts, an all-too-rare event in the retail world. The retailer's profits rose 13.5% for the first quarter. While same-store sales still declined 1.6% — no reason to be jumping for joy in the aisles — many analysts figured the fall would be much worse, in the 4% range. What does Bed Bath & Beyond's improvement say about the state of the consumer psyche? If shoppers are more willing to spend their money on discretionary items like cushioned bath mats and $17 iced-tea pitchers, could we be pulling ourselves out of our long economic malaise?

Call it the Bed Bath & Beyond barometer. Some recent data indicate that as consumers prepare to open up their wallets, they'll be very likely to spruce up their homes. According to a survey from WSL Strategic Retail, of shoppers who say they want to splurge, 44% want to do so on their digs. NPD Group, a market-research firm, also found that when shoppers are asked where they are most likely to spend money, a majority point to their homes. "The nest is where we'll likely see the early signs of a recovery," says Marshal Cohen, a retail analyst at NPD Group.

On a June evening at a sprawling Bed Bath & Beyond store in New York City, a checkout line snaked around the corner as consumers hoarded pots, soaps and Cuisinarts. "Your home is your place of comfort, the only thing you can count on," says Tina Genitti, 21, while carrying a featherbed, a pillow and body creams to the checkout line. "A few months ago, I would have gone for the cheap featherbed. But I spent the extra $5 here because it's time for a treat."

Experts say Genitti's mind-set is quite common in this environment. "What we're beginning to see is the consumer returning to feel-good spending," says Cohen. "But they're not doing it recklessly. They're sticking their feet in the water. Consumers aren't running about and buying new cars or $1,000 handbags. They're saying, Let me get a candle. And take a bath."

While Bed Bath & Beyond's success bodes well for the state of the economy, some analysts warn against reading too much into the company's results. After all, the recession put the company's main competitor, Linens 'n Things, out of business. Linens 'n Things sold similar merchandise in similar markets as Bed Bath & Beyond. So it may just be a lack of competition, rather than a surge in purchasing power, driving Bed Bath & Beyond's positive results. "Consumer spending is wrecked indefinitely," says Howard Davidowitz, chairman of Davidowitz & Associates, a retail investment banking and consulting firm based in New York City. "There is no more Linens 'n Things. How can that not have a tremendous impact on Bed Bath & Beyond?"

Laura Champine, equity analyst at Cowen & Co., upgraded Bed Bath & Beyond from "sell" to "hold" after the latest results were announced. But she's not quite ready to predict a recovery. "Bed Bath & Beyond will have to start showing positive same-store sales if we want to call a bottoming-out," she says. At least the company is close. So guys, don't whine on your trip to Bed Bath & Beyond. Snatch that pomegranate-cider candle for $25. The fruity smell is quite delightful. And our economic future may depend on it.