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Bed Bath & Beyond vs. Kohl’s: Which Retail Stock Is A Riskier Play?
Stock Analysis & Ideas

Bed Bath & Beyond vs. Kohl’s: Which Retail Stock Is A Riskier Play?

The COVID-19 pandemic resulted in difficulties for the retail industry, due to restricted footfalls at physical stores or stores remaining closed. At the same time, websites of retail chains did see brisk business.

According to a CNBC report from last month, citing data from National Retail Federation (NRF), the year-over-year growth in retail sales is expected to range between 10.5% and 13.5% while sales are anticipated to vary from $4.44 trillion to $4.56 trillion in 2021. The report also said that NRF expects “the fastest growth that we’ve seen in this country since 1984.”

Using the TipRanks stock comparison tool, let us compare two retail companies, Bed Bath & Beyond, and Kohl’s, and see how Wall Street analysts feel about these stocks. We will be also looking at the risk factors for these stocks.

Bed Bath & Beyond (NASDAQ: BBBY)

Bed, Bath & Beyond is an omnichannel retailer that sells a wide array of merchandise including bedding, home organization, and personal care items through a combination of physical stores and different websites and apps. Recently, the company was caught up in the short squeeze meme stock mania, and the stock has gained 76.2% year-to-date.

In the first quarter, BBBY’s adjusted earnings came in at $0.05 per share versus an adjusted loss of $1.96 per share. Net sales climbed 49% to $1.95 billion compared to the year-ago period and topped analysts’ expectations of $1.87 billion.  

In Q2, BBBY expects sales to be in the range of $2.04 billion to $2.08 billion for its core businesses, and adjusted earnings to land between $0.48 and $0.55 per share.

BBBY raised its outlook for FY21 and anticipates higher net sales in the range of $8.2 billion to $8.4 billion versus the earlier sales guidance between $8 billion to $8.2 billion. Adjusted earnings are expected to vary from $1.40 to $1.55 per share. Comparable sales are expected to grow in the low single-digit range from Q2 through Q4.

However, the Q1 results did not seem to convince Wells Fargo analyst Zachary Fadem, who remained bearish, reiterating a Sell and raising the price target from $22 to $28 on the stock. Fadem stated in a note to investors that while the company delivered better-than-expected results, “…compares were the easiest BBBY may ever see, home goods demand is unprecedented today, and the company continues to cede market share and underperform its peers.”

According to the new TipRanks Risk Factors tool, BBBY stock is at risk mainly from its Ability to Sell factor, which contributes 26% to the total risk for the stock. Now let’s look at this risk factor in detail.

BBBY stated in its quarterly filing that it may face challenges when it comes to executing its omnichannel strategy and expansion of its operations through e-commerce. The company had unveiled its new growth strategy in October last year. That included the launch of ten new owned brands over the next 18 months, improving its base price competitiveness, and following an omnichannel growth strategy. (See Bed Bath & Beyond stock chart on TipRanks)

BBBY cautioned in its filing regarding this omnichannel growth strategy, and stated that while customers are using technology to compare and purchase its products, “customers are seeking alternate options for delivery of those products.”

“The coordinated operation of our network of physical stores and online platforms is fundamental to the success of our omnichannel strategy, and our ability to compete and meet customer expectations may suffer if we are unable to provide relevant customer-facing technology and omnichannel experiences,” the company added.

As a part of BBBY’s business transformation strategy, the company plans to close 200 stores by the end of this year and had already closed 144 stores by the end of February.

However, according to Fadem, “Despite encouraging new leadership and a thoughtful multi-year (FY21-23) plan, we view BBBY as a structurally challenged asset (Underweight-rated), visibility remains low and the path ahead likely remains bumpy.”

Consensus among analysts on Wall Street is a Hold based on 3 Buys, 7 Holds, and 4 Sells. The average Bed Bath & Beyond price target of $30.91 implies approximately 1.2% downside potential to current levels.

Kohl’s (KSS)

Kohl’s Corp. is a retailer that sells moderately priced private and national brand apparel, footwear, accessories, beauty, and home products through its physical stores and website. As of May 1, the company operated 1,162 stores, 12 FILA outlets, and a website.

In Q1, the company reported total revenues of $3.89 billion that exceeded the consensus estimate of $3.48 billion.

Net sales in the first quarter increased 69.5% to $3.7 billion, while other revenue declined 16% to $0.2 billion. Adjusted earnings came in at $1.05 per share compared to a net loss of $3.22 per share in the year-ago quarter. Analysts were expecting the company to report earnings of $0.04 per share.

KSS raised its outlook for FY21 and now expects net sales to rise “in the mid-to-high teens percentage range” while the adjusted earnings forecast is in the range of $3.80 to $4.20 per share, excluding one-time charges.

Late last month, Jeffries analyst Stephanie Wissink hosted KSS CEO Michelle Gass at Jeffries virtual Nantucket conference and came away bullish on the stock. Wissink reiterated a Buy and a price target of $71 (29.4% upside) on the stock.

As a result of the COVID-19 pandemic, KSS had to temporarily close its stores in the United States. Later, when they reopened, KSS had to undertake various cost-cutting measures, including laying off employees.

KSS stated in its company filing, “During fiscal 2020, we reduced certain of our resources, including decreasing planned capital expenditures and significantly reducing expenses across the business including expenses related to marketing, technology, and operations. This focus on mitigating the impact of COVID-19 could result in the delay of new initiatives, including brand launches.”

However, analyst Wissink pointed out the continued strength in retail sales through May, mentioning “indications of ongoing strength into June, and a series of monthly catalysts that support upside potential for the balance of the year.”

According to the new TipRanks Risk Factors tool, the KSS stock is at risk mainly from its Ability to Sell factor, which contributes 27% to the total risk for the stock. Now let’s look at this risk factor in detail.

Kohl’s lists the inability to successfully execute an omnichannel strategy as one of the risks that could affect its ability to sell. The company has said in its company filing that its competitiveness and ability to meet the expectations of customers may suffer if KSS is unable to provide omnichannel experiences and customer-facing technology. (See Kohl’s stock chart on TipRanks)

Analyst Wissink’s downside potential to the stock assumes that if consumers fail to return to KSS stores at pre-pandemic levels, even after a successful vaccine rollout, KSS’s gross margin could deteriorate. Even as Kohl’s sees higher e-commerce sales, higher shipping costs and promotional expenses, could drag it down.

However, Wissink feels upbeat about the stock, saying, “We believe KSS’s sales, margin, and store experience initiatives, in addition to the relative resilience of its off-mall real estate and a degree of pent-up consumer shopping demand, will drive a faster and more measurable EBITDA recovery than the market expects.”

“While the long-term growth algorithm remains uncertain, a healthy balance sheet, persistent FCF, and capital return commitments hedge downside risk,” the analyst added.

Consensus among analysts on Wall Street is a Moderate Buy based on 3 Buys and 2 Holds. The average Kohl’s price target of $66.20 implies approximately 20.6% upside potential to current levels.

Bottomline

While analysts are cautiously optimistic about Kohl’s, they are sidelined on Bed Bath & Beyond. The risk profiles of the two stocks are a bit different.

Compared to a sector average Ability to Sell risk factor of 18.6%, Kohl’s is at 27.3%, while for BBBY it is 26.1%. Based on this risk factor, it appears that Kohl’s is a slightly riskier bet than Bed Bath & Beyond.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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