Better Buy: Bed Bath & Beyond vs. Kohl's

Bed Bath & Beyond (BBBY) and Kohl's (KSS -2.01%) were both victims of the retail apocalypse over the past decade. Both big-box retailers struggled to compete against Amazon, Walmart, Target, and other well-run competitors, and they both failed to keep up in the e-commerce arms race.

Over the past 10 years, Bed Bath & Beyond's stock lost more than 90% of its value, and Kohl's stock declined about 40%. Both stocks now trade at less than one times this year's sales -- steep discounts stemming from investor pessimism about their turnaround efforts.

Should contrarian investors consider either of these struggling retailers to be a viable turnaround play? Let's dig deeper to find out.

Image source: Getty Images.

What happened to Bed Bath & Beyond?

Bed Bath & Beyond attempted to reset its business in late 2019 by hiring Mark Tritton, Target's former chief merchandising officer, as its new CEO. Tritton subsequently fired most of the company's executives, divested most of its non-core businesses, shuttered hundreds of weaker Bed Bath & Beyond locations, cleared out its excess inventories with steep discounts, and aggressively invested in the expansion of its e-commerce ecosystem.

Tritton immediately faced his first major challenge when the pandemic forced the company to temporarily close its stores in the first quarter of 2020. But starting in the second quarter, Bed Bath & Beyond's comparable store sales improved for four consecutive quarters.

Unfortunately, that streak ended in the second quarter of 2021, and its comps subsequently declined for four consecutive quarters. Its gross margins also tumbled and dropped below 30% over the past two quarters.

Data source: Bed Bath & Beyond.

The company attributed that deterioration to new waves of COVID-19 infections, supply chain disruptions, and inflationary headwinds. However, many of its peers -- including Target and Walmart -- faced the same challenges but maintained positive comps growth. As a result, the board dismissed Tritton at the end of June.

Bed Bath & Beyond's total store count declined from 1,552 locations across all its banners in 2018 to just 953 locations at the end of 2021, but it might need to shutter even more stores to right-size its business.

What happened to Kohl's?

For many years, Kohl's escaped the retail apocalypse by staying away from malls with stand-alone stores, organizing those stores with easy-to-navigate "racetrack" floor plans, rotating its products quickly, and keeping its inventory levels lean. In 2019, it struck a deal with Amazon to accept and process the online retailer's returns to drive more shoppers to its brick-and-mortar stores.

However, Kohl's growth started to cool off in 2019, even as CEO Michelle Gass tried to bring back shoppers by leasing out its floor space to Planet Fitness' gyms and Aldi's supermarkets, as well as partnering with LVMH's Sephora to open more store-in-stores.

Kohl's comparable store sales declined 1% in 2019, and it replaced that metric with a simpler "net sales" metric in 2020 (which is roughly equivalent to its comps) as it temporarily closed down its stores during the pandemic. Its net sales declined 20% in 2020, then rose 23% in 2021 as it reopened its stores.

Unfortunately, Kohl's sales growth cooled off again over the past year as it grappled with supply chain disruptions and inflationary headwinds. On the bright side, its gross margins still look healthier than Bed Bath & Beyond's.

Data source: Kohl's.

Unlike Bed Bath & Beyond, Kohl's isn't aggressively shuttering its stores to cut costs. It ended the first quarter of 2022 with 1,165 stores, compared to 1,162 locations a year ago and 1,159 locations at the end of 2018.

Kohl's business is in better shape than Bed Bath & Beyond's, but ongoing takeover rumors have repeatedly rattled its shares. Amazon was initially cited as a possible suitor, and Kohl's nearly sold itself to Franchise Group (FRG) for $9 billion before walking away from the deal on July 1.

The valuations and verdict

Analysts expect Bed Bath & Beyond's revenue to decline 17% this year with a wider net loss. They expect Kohl's revenue and earnings to fall 5% and 12%, respectively, this year.

Bed Bath & Beyond trades at just 0.05 times this year's sales, but it can't be valued by its non-existent profits. Kohl's trades at 0.2 times this year's sales and just four times forward earnings. Those valuations indicate that investors are slightly more bullish on Kohl's prospects than Bed Bath & Beyond's.

Both of these retail stocks are very risky investments. But if I had to choose one over the other, I'd stick with Kohl's -- which is still a potential buyout candidate -- instead of Bed Bath & Beyond's struggling and shrinking business.