Forget Bed Bath & Beyond, this stock is a better buy now

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As expected, Bed bath and beyond (NASDAQ: BBBY) recently announced head-turning operating measures as the company emerged from its deep pandemic crisis. CEO Mark Tritton and his team celebrated the specialty retailer’s growing growth and rebounds in profitability at the start of fiscal 2021. But the business continues to shrink as it closes underperforming stores, and there are a lot of uncertainty as to where profitability will land once management is complete with the company’s three-year restructuring plan.

In the meantime, investors looking for a well-run retailer have better options to choose from. Let’s see why you might want to buy Target (NYSE: TGT) stock on Bed Bath & Beyond today.

Image source: Getty Images.

Offense is better than defense

This week, Bed Bath & Beyond trumpeted the fact that it just recorded its fourth consecutive quarter of same-store sales growth. Revenue increased 3% from 2019 levels (and jumped 73% from a year ago, when stores were closed). The retailer “reestablishes our house of authority [products]”said Tritton in a press release,” to regain market share and unleash our full potential “.

However, Target is doing much better. Rather than playing the defense, the retailer has added about $ 10 billion in new market share over the past year, mostly in home products. The channel’s absolute sales are also skyrocketing.

In contrast, Bed Bath & Beyond is targeting up to $ 8.4 billion in revenue this year after its latest outlook upgrade. This is still below the 2020 result due to store consolidations, a management strategy called “recapture and maintain”.

The platform is already working

Bed Bath & Beyond is building an omnichannel selling platform that reflects consumers’ growing desire to shop online and pick up in-store orders or choose super-fast home deliveries. This network would potentially generate strong profits, especially as the chain focuses on high-end products and lacks Target’s low-margin grocery business. Investors can already see evidence of this success, with a gross profit margin reaching 35% of sales in the first quarter.

Target is enjoying a similar rebound, but its margin is closer to 30% of sales. Yet the national chain already has the kind of platform Bed Bath & Beyond hopes to build over the next few years. Consumers are excited about Target’s convenient shipping and pickup options, as confirmed by the rapid growth of niches such as clothing, home goods and sporting goods.

Simply put, you are likely to get better returns from owning a retailer with a proven multi-channel platform than by betting on a business that could build such a platform over time.

Cash returns and valuation

Target is the best bet when it comes to direct cash returns. The company just announced its 50th consecutive annual dividend increase – a peak of 32% – after last year’s record profits. Management is also aggressively spending on share buybacks, with more than $ 3 billion remaining in their buyback plan.

Bed Bath & Beyond, on the other hand, suspended its spending on dividends and buybacks last year. And the prospects for either return are dim in the near term, as the company prioritizes debt repayment even as it shrinks its store base.

Of course, you’ll have to pay a premium for all the competitive and financial advantages Target enjoys over Bed Bath & Beyond – the stock is valued at 1.2 times sales today, compared to less than 0.5 times sales. for the specialist retailer. This valuation gap reduces the risk of overpaying for Bed Bath & Beyond, especially if management’s optimistic rebound plan materializes by fiscal 2023.

Still, I’d rather put my money in a growing industry leader who is entering its fifth decade of growing dividend payouts.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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