Target Corporation (TGT) and Bed Bath & Beyond Inc. (BBBY) are two prominent players in the retail industry. TGT in Minneapolis, Minn., is a general merchandise retailer that offers food assortments, apparel, accessories, home decor products, electronics, seasonal offerings, and beauty and household essentials through its stores and digital channels. As of January 30, 2021, the company operated approximately 1,897 stores. In comparison, BBBY in Union, N.J., operates a chain of retail stores that sells domestic merchandise, home furnishings, consumables, and various juvenile products internationally. It also operates Decorist, an online interior design platform that provides personalized home design services. BBBY operated 1,020 stores as of February 27, 2021.
Despite rising inflation, supply chain disruptions, and a slowdown in third-quarter GDP growth, U.S. retail sales rose 0.9% year-over-year in August, 0.7% in September, and 0.9% in October. Furthermore, declining jobless claims each week, rising consumer spending, and the lifting of travel bans should continue to help retailers generate solid sales. The National Retail Federation (NRF) forecasts holiday retail sales to rise between 8.5% -10.5% during November and December. The global retail market is expected to grow at a 7.7% CAGR to $29.45 trillion in 2025. So, both TGT and BBBY should benefit.
But while BBBY’s shares have declined 15% in price over the past six months, TGT has surged 18.8%. TGT is a clear winner with 64.7% gains versus BBBY’s 15.8% returns in terms of their past year’s performance. But which of these stocks is a better pick now? Let’s find out.
On October 26, TGT introduced ‘Shopping Partner,’ ‘Backup Items,’ and ‘Forgot Something’ features to its industry-leading Drive-Up, Order Pickup, and Same-Day Delivery with Shipt services. These convenient offerings have helped the company generate tremendous sales over the past year, and it expects to capitalize from rising holiday sales toward the end of this year.
On November 2, 2021, BBBY and The Kroger Company (KR), the nation’s second-largest grocery retailer, announced a strategic collaboration to offer BBBY’s selected home and baby products through KR’s Kroger.com website as well as a small-scale physical store pilot at select KR’s family of stores beginning in 2022. Bringing BBBY’s products to KR’s e-commerce and in-store experiences should enable BBBY to gain more market reach in the future.
Recent Financial Results
TGT’S total revenue for its fiscal second quarter, ended July 31, 2021, increased 9.5% year-over-year to $25.16 billion. The company’s operating income was $2.47 billion, up 7.3% from the prior-year period. Its net earnings came in at $1.82 billion for the quarter, representing a 7.5% rise from its year-ago period. And its adjusted EPS was $3.64, indicating a 7.7% year-over-year improvement. The company had $7.37 billion in cash and cash equivalents as of July 31, 2021.
For its fiscal second quarter, ended August 28, 2021, BBBY’s net sales decreased 26.2% year-over-year to $1.99 billion. The company’s adjusted gross profit came in at $674.75 million, representing a 30% decline from the prior-year period. BBBY’s operating loss was $84.11 million for the quarter, versus a $270.54 million operating profit in the year-ago period. While its adjusted net income decreased 94.1% year-over-year to $3.70 million, its adjusted EPS decreased 92% year-over-year to $0.04. The company had $970.59 million in cash and cash equivalents as of August 28, 2021.
Past and Expected Financial Performance
TGT’s revenue and EBITDA increased at CAGRs of 10.5% and 17.4%, respectively, over the past three years. And the company’s total assets have grown at an 8.7% CAGR over the past three years.
Analysts expect TGT’s EPS to increase 38% year-over-year in the current year and decline marginally next year. Its revenue is expected to increase 11.7% year-over-year in the current year and 1.7% next year. And the company’s EPS is expected to grow at a 13.3% rate per annum over the next five years.
In comparison, BBBY’s revenue and EBITDA have declined at CAGRs of 9.5% and 11.3%, respectively, over the past three years. The company’s total assets have declined at a 25.2% CAGR over the past three years.
BBBY’s EPS is expected to rise 182.7% year-over-year in the current year and 86.4% next year. Its revenue is expected to decline 11.5% year-over-year in the current year and 0.7% next year. And analysts expect the stock’s EPS to grow at a 53.3% rate per annum over the next five years.
In terms of forward EV/Sales, TGT is currently trading at 1.26x, which is 137.7% higher than BBBY’s 0.53x. And in terms of forward EV/EBITDA, BBBY’s 10.08x compares with TGT’s 11.85x.
TGT’s trailing-12-month revenue is almost 10.9 times higher than BBBY’s. Also, TGT is more profitable, with an 11% EBITDA margin versus BBBY’s 7.1%.
Moreover, TGT’s 6.3% and 46% respective net income margin and ROE compare with BBBY’s negative values.
While TGT has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, BBBY has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
TGT and BBBY have a B grade for Value, which is consistent with their lower-than-industry valuation ratios. TGT has a 1.26x forward EV/Sales, which is 14.7% lower than the 1.48x industry average. BBBY’s 0.53x forward EV/Sales is 64.3% higher than the 1,48x industry average.
In terms of Quality, TGT has been graded a B, which is consistent with its higher-than-industry profitability ratios. TGT’s 17.8% trailing-12-month return on total capital is 132.7% higher than the 7.7% industry average. In comparison, BBBY’s C grade for Quality is in sync with its relatively lower profit margins. The company has a 4.6% trailing-12-month return on total capital, which is 40.3% lower than the 7.7% industry average.
Beyond what we have stated above, our POWR Ratings system has also rated TGT and BBBY for Growth, Momentum, Stability, and Sentiment. Get all TGT ratings here. Also, click here to see the additional POWR Ratings for BBBY.
Rising consumer spending ahead of the holiday season should drive TGT and BBBY’s sales. However, we think its higher profitability makes TGT a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Grocery/Big Box Retailers industry, and here for those in the Home Improvement & Goods industry.
Recently the Reitmeister Total Return Portfolio (RTR) closed a winning trade in TGT for a 65% gain. Learn more about the RTR service here.
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TGT shares were trading at $254.77 per share on Thursday afternoon, up $0.72 (+0.28%). Year-to-date, TGT has gained 45.80%, versus a 25.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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