Many investors continue to pile into Bed Bath & Beyond (BBBY +0.00%) stock despite the fact that high-profile investor Ryan Cohen, who many of them followed into the investment, has abandoned his position in the company. Even worse, the company is not profitable and recently needed to secure additional financing so that it could get vendors to start sending it merchandise again.
It's understandable that investors are bargain hunting for turnaround plays like Bed Bath & Beyond in the beaten-down retail sector, but they are likely wasting their time and effort. The good news is that there are plenty of interesting stocks in the sector that offer much more potential.
All three of the following retail stocks are profitable and trade at attractive valuations, and two pay market-beating dividends. Furthermore, all three have catalysts or potential growth drivers that make them legitimate turnaround plays, unlike Bed Bath & Beyond.
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1. Petco
Shares of Petco Health and Wellness (WOOF 0.20%) got slammed in August when the pet supplies retailer missed earnings estimates and reported single-digit percentage revenue growth after reporting double-digit revenue growth in every previous quarter as a publicly traded company.
However, revenue is still growing during a challenging time, and the company is profitable. Petco was a big winner during its reentry to the public market in 2021, but this year, shares are down 24% year to date. After the sell-off, the stock is beginning to look like a buy at about 17 times forward earnings.
Selling pet food and supplies is a defensive business, and Petco deserves credit for that, but there's a lot more to the San Diego-based company than just selling dog food. The real long-term growth driver, and what makes Petco a sticky business, is that it also provides services like grooming, training, and veterinary services.
Petco even offers pet insurance, which complements its veterinary offerings. During the most recent quarter, sales from services grew by 13% year over year, and an even more impressive 62% over a two-year time frame. These types of services make Petco a one-stop shop and give the business a flywheel effect where customers may come in to get grooming or for a checkup, and then buy their pet food while they are there or make a discretionary purchase of a pet toy.
NASDAQ: WOOF
Key Data Points
With a modest valuation, a larger base of potential customers than ever before (the ASPCA estimates that 23 million Americans adopted new pets during the pandemic), and a suite of offerings that are making the company a vital one-stop shop for pet owners, Petco looks like a good long-term investment.
2. Foot Locker
In some ways, Foot Locker (FL +0.00%) looks similar to Bed Bath & Beyond as a brick-and-mortar retailer that has struggled to find its place in the age of e-commerce. But unlike Bed Bath & Beyond, Foot Locker is profitable, trades at a very attractive valuation of just 7.5 times earnings, and pays a substantial dividend that yields over 4%.
Part of the reason Foot Locker shares have slumped is investor concern that Nike, a major supplier of its merchandise, might cut Foot Locker off as it focuses on expanding its own direct-to-consumer channel. But Nike has already cut ties with many other vendors, including Amazon. Nike still maintains its relationship with Foot Locker, so it seems that the sneaker giant views Foot Locker as a necessary partner.
NYSE: FL
Key Data Points
Foot Locker shareholders received a major boost with news that Mary Dillon is taking over as the company's CEO in September. During Dillon's time as CEO of Ulta Beauty, e-commerce sales increased from 4% to 30% of the company's total revenue, and the chain doubled its store count. Ulta's stock doubled during this time frame. This e-commerce acumen will be valuable for Foot Locker as the company works to expand its own e-commerce business.
With a talented and proven CEO taking the wheel, concerns about Nike that seem overstated, and an attractive valuation, Foot Locker looks like a compelling investment opportunity.
3. Best Buy
Best Buy (BBY 0.73%) is another retail stock that has struggled this year. The company cut 2023 guidance due to inflation and softening demand for consumer electronics, and shares of Best Buy are down 27% year to date.
But these challenges look like they are already priced into the stock. Like Foot Locker, Best Buy is another retailer with an attractive valuation, and it offers an even better dividend. Best Buy trades at just eight times earnings, and the stock currently yields well over 4%.
NYSE: BBY
Key Data Points
Best Buy is working to differentiate itself from Amazon and other online retailers. The company is utilizing its physical locations to drive omnichannel sales, and 99% of U.S. zip codes now have access to one-day shipping from Best Buy, increasing its viability as an Amazon alternative.
As with Petco's veterinary services, Best Buy is differentiating itself and making itself sticky with its customer support and its Totaltech program. Totaltech gives customers access to special pricing and free two-day shipping, free Geek Squad tech support 24/7, and free delivery, installation, and haul-away for Best Buy purchases. Free installation for a product like a dishwasher or refrigerator, or mounting a new TV, are compelling offerings to customers.
Best Buy's large physical footprint and sales staff enable it to provide post-sale support on purchases of electronics, which not only keeps its customers happy, but also makes it a valuable partner to vendors.
Diamonds in the retail rough
The retail sector offers plenty of diamonds in the rough. All three of these stocks look like good additions to investor portfolios and appear to be stronger choices than Bed Bath & Beyond.
