As expected, Bed Bath & Beyond (BBBY +0.00%) recently announced some head-turning operating metrics as the business emerged from its deep pandemic slump. CEO Mark Tritton and his team celebrated the specialty retailer's increasing growth and profitability rebounds at the start of fiscal 2021. But the business is still shrinking as it closes underperforming stores, and there's a lot of uncertainty about where profitability will land after management is done 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 look at why you might want to buy Target (TGT +2.33%) stock over Bed Bath & Beyond today.
Image source: Getty Images.
Offense is better than defense
This week, Bed Bath & Beyond trumpeted the fact that it just notched its fourth consecutive quarter of comparable-store sales growth. Revenue rose 3% compared to 2019 levels (and jumped 73% compared to a year ago when stores were shut down). The retailer is "re-establishing our authority home [products]," Tritton said in a press release, "recapturing market share, and unlocking our full potential."
However, Target is faring much better. Rather than playing defense, the retailer added roughly $10 billion of new market share over the past year, mainly in products for the home. The chain's absolute sales are soaring, too.
In contrast, Bed Bath & Beyond is targeting as much as $8.4 billion in revenue this year after its latest outlook upgrade. That's still below 2020's result due to store consolidations, a strategy management has called "recapture and sustain."
The platform already works
Bed Bath & Beyond is busy crafting an omnichannel selling platform that reflects consumers' growing desire to shop online and either pick up orders in stores or choose ultra-fast home deliveries. That network would potentially generate strong earnings, especially since the chain focuses on premium products and lacks Target's low-margin grocery business. Investors can see evidence of that success already, with gross profit margin rising to 35% of sales in Q1.
Target is enjoying a similar lift, but its margin is closer to 30% of sales. Still, the national chain already owns the type of platform that Bed Bath & Beyond is hoping to build over the next few years. Consumers are thrilled with Target's convenient shipping and pick-up options, as confirmed by surging growth in niches like apparel, home goods, and sporting goods.
Simply put, you'll likely get better returns by owning a retailer with a proven multi-channel platform than by betting on a business that might build such a platform over time.
Cash returns and valuation
Target is the better bet when it comes to direct cash returns. The company just announced its 50th consecutive annual dividend increase -- a 32% spike -- following last year's record earnings haul. Management is also spending aggressively on stock buybacks, with over $3 billion remaining in its repurchase plan.
Bed Bath & Beyond, on the other hand, suspended its dividend and repurchase spending last year. And the prospects for either one to return are weak in the short term since the company is prioritizing debt paybacks even as it shrinks its store base.
Sure, you'll have to pay a premium for all of the competitive and financial advantages that 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 specialty retailer. That valuation gap lessens the risk of overpaying for Bed Bath & Beyond, especially if management's optimistic rebound plan works out between now and fiscal 2023.
Yet I'd rather park my cash in a growing industry leader that's entering its fifth decade of rising dividend payouts.
