Better Buy: Bed Bath & Beyond vs. GameStop

Bed Bath & Beyond (BBBY) and GameStop (GME 1.55%) are two of the market's wildest meme stocks. Both brick-and-mortar retailers face existential challenges, yet their stocks have been propped up by retail investors and short-term traders who have focused on their short-squeeze potential instead of their underlying weaknesses.

Bed Bath & Beyond's stock sank below $4 during the COVID-19 crash in March 2020, yet skyrocketed to the mid-$30s last January. It then plunged back below $5 this June, then bounced back to about $13. GameStop traded at less than $1 (on a split-adjusted basis) throughout most of 2020, soared to an all-time high of $86.88 last January, and now trades in the low $30s.

Image source: Getty Images.

Risk-averse investors should avoid both of these volatile stocks, but should more daring investors take a chance? Let's take a fresh look at both companies to find out.

Is Bed Bath & Beyond the next Sears?

Bed Bath & Beyond was already in bad shape before the pandemic started. It was struggling to compete against Amazon, Walmart, Target, and other large retailers, and it had overexpanded and diluted its brand with ill-advised acquisitions.

Eventually, an activist revolt in 2019 drove out its CEO Steven Temares, brought in Target's chief merchandising officer Mark Tritton as his successor, and cleared out most of the company's C-suite. Tritton tried to turn around the company by closing hundreds of its weaker namesake stores, divesting its non-core banners, reducing its inventories with steep discounts, and expanding its e-commerce ecosystem.

Unfortunately, the pandemic derailed those efforts with store closures, and its underdeveloped e-commerce platform failed to offset that slowdown. Its comparable-store sales briefly improved as the lockdown measures ended, but that recovery fizzled out as supply chain disruptions and inflationary headwinds sidetracked its recovery over the past year. 

Data source: Bed Bath & Beyond. YOY = Year over year.

That downward spiral led to the dismissal of Mark Tritton in late June. Activist investor Ryan Cohen, who had previously stirred up a lot of retail interest in the stock on Reddit, also sold his entire position in mid-August. Analysts expect its revenue to decrease 17% to $6.5 billion this year and its net loss to widen from $560 million to $633 million.

Interim CEO Sue Gove is trying to resolve the retailer's supply chain and inventory issues, stabilize its long-term debt (which hit $1.4 billion last quarter), and improve its liquidity. She also recently announced more store closures and layoffs to stabilize its margins. But the company still hasn't proven that it isn't the next Sears yet.

Is GameStop the next Blockbuster?

GameStop was once a top destination for video game purchases. But over the past decade, more video game publishers prioritized high-margin digital downloads, which were easier to distribute, over lower-margin physical game sales. More consumers also bought their gaming consoles and accessories online. That secular shift suggested that GameStop, which had overexpanded its brick-and-mortar presence throughout its heyday, could become the next Blockbuster, the former top movie rental store chain. 

For a while, GameStop offset its declining sales of physical games by selling toys and collectibles. But that business didn't have much of a moat against larger retailers, and the company's comparable-store sales declined in 2018, 2019, and 2020 even as it desperately closed down hundreds of stores. It stopped reporting its comps growth altogether in 2021 as it closed hundreds of additional stores and expanded its e-commerce business. It even launched an NFT marketplace this year. 

That aggressive right-sizing strategy, which has been led by Amazon Australia's former country leader Matt Furlong since last June, seems to be paying off. GameStop's net sales rose 18% in 2021, which ended its three-year streak of top-line declines, and its growth has been stabilizing against some tough comparisons to its post-lockdown recovery last year.

Data source: GameStop.

Analysts expect GameStop's revenue to rise 8% to $6.46 billion this year but its net loss to still widen from $381 million to $474 million. On the bright side, the company held only $36 million in long-term debt at the end of the first quarter, so it's much less leveraged than Bed Bath & Beyond.

Are these stocks buy opportunities?

Bed Bath & Beyond trades at just 0.2 times this year's sales, and about 36% of its outstanding shares were still being shorted at the end of July. Therefore, any positive news could still drive its stock a lot higher. GameStop trades at 1.5 times this year's sales, and 20% of its outstanding shares were being shorted at the end of July. Its valuation is still low and its short interest remains high, but the market clearly seems more optimistic about its turnaround efforts than Bed Bath & Beyond's.

I personally wouldn't buy either of these stocks right now. However, GameStop's stable leadership, steady sales growth, and lower debt clearly make it a more promising meme stock bet than Bed Bath & Beyond.