Better Buy for 2022: Target vs. Bed Bath & Beyond

Despite surging prices and worsening supply chain due to the Russian invasion of Ukraine, U.S. consumer spending maintained positive momentum in February, as overall retail sales, excluding auto, increased 8.7% year-over-year, according to a Mastercard Inc (MA) report. Moreover, the increasing physical store sales and continued online buying trends with the reopening of the economy should help retailers benefit by passing on the rising costs to consumers. According to a Research and Markets report, the global retail market is expected to grow at a CAGR of 7.7% by 2025. Therefore, both Target Corporation (TGT) and  Bed Bath & Beyond Inc. (BBBY) should benefit. 

General merchandise retailer TGT has roughly 1,909 stores across the United States and operates 44 distribution centers. It sells its products through its stores and digital channels. BBBY operates a chain of retail stores that operates through two segments: North American Retail and Institutional Sales. The company sells a range of domestic merchandise and home furnishings.

TGT has gained 19.5% over the past year, while BBBY is down 34.5%. Which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On March 1, 2022, TGT announced its plan to invest up to $5 billion to continue scaling its operations in 2022. Target will invest in its physical stores, digital experiences, fulfillment capabilities, and supply chain capabilities that further differentiate its retail offering and drive continued growth.

On January 6, 2022, Mark Tritton, BBBY’s President and CEO said, “We are identifying exciting new opportunities to drive sales and BABY is an important cornerstone of our plans, including our recently announced collaboration with Kroger and our own digital marketplace."

Recent Financial Results

TGT’s total revenue increased 9.4% year-over-year to $31 billion for the fiscal fourth quarter ended January 29, 2022. Its EBITDA grew 13.7% year-over-year to $2.81 billion, while its net earnings came in at $1.54 billion, representing an 11.9% year-over-year increase. Also, its adjusted EPS came in at $3.19, up 19.2% year-over-year.

BBBY’s net sales decreased 28% year-over-year to $1.88 billion for the third quarter ended November 27, 2021. The company’s adjusted EBITDA declined 66.1% year-over-year to $41 million, while its adjusted net loss came in at $25 million compared to an income of $10 million in the prior-year quarter. Also, its adjusted loss per share came in at $0.25 compared to an EPS of $0.08 in the year-ago period.

Expected Financial Performance

Analysts expect TGT’s revenue to increase 3.6% in the current year and 4.7% next year. The company’s EPS is expected to grow 7.5% in the current year and 9.1% next year. Moreover, its EPS is expected to grow at a rate of 14% per annum over the next five years.

On the other hand, BBBY’s revenue is expected to decrease 14.5% in the current year and 1.6% next year. However, its EPS is expected to grow 88.8% in the current year and 754.5% next year. BBBY’s EPS is expected to grow at a rate of 53.3% per annum over the next five years.

Profitability

TGT’s trailing-12-month revenue is 12.56 times what BBBY generates. TGT is also more profitable with an EBITDA margin of 11.04% compared to BBBY’s 6.44%.

Furthermore, TGT’s ROA and ROTC of 10.78% and 19.25% are higher than BBBY’s 2.47% and 3.85%, respectively.

Valuation

In terms of forward non-GAAP P/E, BBBY is currently trading at 27.27x, 104.9% higher than TGT’s 13.31x. Moreover, BBBY’s forward EV/EBITDA ratio of 14.60x is 61% higher than TGT’s 9.07x.

So, TGT is relatively affordable here.

POWR Ratings

TGT has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. On the other hand, BBBY has an overall rating of D, which translates to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

TGT has a B grade for Sentiment. This is justified as the Wall Street analysts expect the stock to hit $272.56 in the near term, which indicates a potential upside of 30.6%. On the other hand, BBBY has an F grade for Sentiment, as the Wall Street analysts expect the stock to hit $14.41 in the near term, which indicates a potential decline of 25%.

Also, TGT has a B grade for Value, consistent with its forward P/CF of 11.10x, 6.8% lower than the industry average of 10.39x. However, BBBY has a C grade for Value, consistent with its forward P/CF of 15.80x, 50% higher than the industry average of 10.53x.

Moreover, TGT has a grade of B for Quality. This is justified given TGT's 19.25% trailing-12-month ROTC, 144.4% higher than the industry average of 7.88%. On the other hand, BBBY has a Quality grade of C, in sync with its 3.85% trailing-12-month ROTC, 51.1% lower than the industry average of 7.88%.

Of the 39 stocks in the A-rated Grocery/Big Box Retailers industry, TGT is ranked #14. However, BBBY is ranked #54 out of 65 stocks in the Home Improvement & Goods industry.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Stability, and Momentum. Click here to view all the TGT ratings. Also, get all the BBBY ratings here.

The Winner

The retail industry is expected to grow significantly with the rapid shift to online platforms and easing COVID-19 restrictions. While both TGT and BBBY are expected to benefit, it is better to bet on TGT now because of its robust financials, lower valuation, higher profitability, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Grocery/Big Box Retailers industry here. Also, click here to access all the top-rated stocks in the Home Improvement & Goods industry.

TGT shares . Year-to-date, TGT has declined -6.55%, versus a -10.27% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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