The impending holiday season has again brought the focus on retail stocks. It has also brought forth the question of whether retail sales will soar or will suffer from the impact of the COVID-19 pandemic.
The National Retail Federation (NRF) expects that retail sales during the month of November and December this year will grow between 8.5% and 10.5% year-over-year to be in the range of $843.4 billion to $859 billion. (See Top Smart Score stocks on TipRanks)
NRF chief economist Jack Kleinhenz commented, “There are several factors coming together to have a major impact on the holiday outlook, but household fundamentals are a bright spot in the uncertain present.”
Let’s compare two retailers, Bed Bath & Beyond (BBBY) and Kohl’s (KSS), and look at how these two companies are positioned before the holiday season. We will also see how Wall Street analysts feel about these stocks using the TipRanks stock comparison tool.
Bed Bath & Beyond
Shares of Bed Bath & Beyond have soared 44% over the past month. It is likely that the rise in the stock was fueled by a flurry of press releases last week and a short squeeze. A short squeeze results in a rapid rise in the price of a stock with contrarian investors trying to estimate a short squeeze and buy stocks with a heavy short interest.
As of October 15, BBBY had a short interest of 26.8 million. Short interest is the number of shares that investors have sold short but have not been closed out or not yet been covered.
Considering the soaring stock price, Wells Fargo analyst Zachary Fadem believes that the “shares have temporarily disconnected from economic reality.” The analyst is bearish and reiterated a Sell with a price target of $14 (approximately 34.7% downside) on the stock.
In Q3, the omnichannel retailer anticipates net sales between $1.96 billion to $2 billion, reflecting sales from the company’s four core banners including Bed Bath & Beyond, buybuy BABY, Harmon Face Values and Decorist.
Last week, Mark Tritton, Bed Bath & Beyond president and CEO commented in a business update that the company’s sales to date “have remained consistent with the September trends we shared on our earnings call several weeks ago. Our focus remains on delivering comp sales growth in the all-important November month, which represents a disproportionately larger impact to our quarterly sales.”
Tritton also said that “the corrective and surgical pricing actions” implemented have resulted in the company being on track to achieve its expected gross margin. BBBY anticipates adjusted gross margin in the range of 34% to 35% in Q3.
When it comes to share repurchases, BBBY is on track to complete its three-year stock buyback plan worth $1 billion by the end of FY21, two years ahead of schedule. In the first half of FY21, BBBY has repurchased shares worth $225 million under its buyback plan.
Last week, Bed Bath & Beyond also announced a strategic partnership with The Kroger Co. (KR) that will offer Kroger customers a selection of home and baby products from BBBY through Kroger’s website and a small-scale physical store on a pilot basis beginning from next year.
However, Fadem is apprehensive about this partnership as he has seen “’shop-in-shop’ models like this before with very mixed success.”
BBBY also plans to launch a digital marketplace to expand its selection of key products through third-party partners. While Fadem thinks that this could be “interesting,” he believes “it’s too soon to know how material this initiative could be; and with store and web traffic declining.”
Moreover, the analyst pointed out that in light of fewer details, “there is no proof of concept, and we ultimately view the announcement as noise to overshadow an otherwise challenged fundamental outlook.”
Wall Street analysts are cautiously bearish on the stock with a Moderate Sell rating based on one Buy, three Holds, and six Sells. The average Bed Bath & Beyond price target of $18.67 implies approximately 12.2% downside potential to current levels, suggesting that the stock has overshot its valuation.
Kohl’s
Investors are evincing keen interest in Kohl’s Corp. as the stock has soared by approximately 28% in the past month. The retailer that sells moderately priced products through its physical stores and website, and is expected to release its Q3 results on November 18. As of July 31, the company operated 1,162 stores.
The company has raised its outlook following its strong Q2 results and now anticipates its net sales to rise “in the low-twenties percentage range” compared to the prior expectation of growth in the “mid-to-high teens percentage.”
Moreover, KSS anticipates FY21 operating margin to be between 7.4% to 7.6% from the prior expectation between 5.7% to 6.1%, while adjusted earnings are now estimated to be between $5.80 to $6.10 per share.
Back in October last year, Kohl’s had revamped its business strategy with four key focus areas: “driving top line growth, expanding operating margin, maintaining disciplined capital management, and sustaining an agile, accountable, and inclusive culture.”
As a part of this strategy, the company had also announced the launch of FLX, a specialty athleisure private label brand as part of Kohl’s plans to be a destination for active and casual wear categories.
At its Q2 earnings call, Kohl’s CEO Michelle Gass stated that the company aims to make active and outdoor wear 30% of its business.
This upbeat outlook has been marred by supply chain issues. At its Q2 earnings call, Kohl’s management admitted, “our women’s business has a disproportionate exposure [to supply chain issues] given its high penetration of private brands.” (See Analysts’ Top Stocks on TipRanks)
Bank of America analyst Lorraine Hutchinson is also concerned about these supply chain issues. The analyst downgraded the stock from a Buy to a Sell last month and said that investors should brace themselves for a difficult second half of the year if the flow of products slows down due to supply chain issues.
Furthermore, the analyst pointed out that while KSS is bullish about its outlook for active and outdoor wear segment, “KSS’ top performing active brands Nike, Under Armour, Adidas, and Champion are facing supply chain issues.”
While Hutchinson admitted that the company was “actively working to secure inventory to address the situation but conditions have gotten worse, not better since the 2Q call. This puts the high end of F2021 guidance at risk, in our view.”
The analyst has a price target of $48 with a 18.4% downside on the stock. In the end, Hutchinson commented, “The stock is relatively inexpensive but with declining estimates, we see downside.”
Wall Street analysts are sidelined on the stock with a Hold rating based on four Buys, three Holds, and two Sells. The average Kohl’s price target of $64 implies approximately 8.9% upside potential to current levels.
Bottom Line
While supply chain concerns remain, analysts are bearish about BBBY and sidelined about Kohl’s. It remains to be seen how Kohl’s handles supply chain issues in Q3. When it comes to BBBY, it is not clear how its revamped business strategy will play out in the near future.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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