Skip Bed Bath & Beyond, These 2 Retail Stocks Are Better Buys

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In a post on the Bed Bath & Beyond BBBY corner of the WallStreetBets Reddit thread, one poster offered the following disclaimer: This is a casino. Gamble responsibly. This is not a financial advice. I am not your financial advisor, just a regarded Wendy’s employee working extra shifts.

Alas, many view the stock market as a casino, with meme-stock trading this year and much of last providing little reason for investors to believe that the odds are not stacked against them. Sadly, the momentum of hundreds or thousands of fellow Redditors turned against our fast-food friend the day Chewy Co-Founder and GameStop GME Chairman CEO Ryan Cohen revealed plans to liquidate his stake in the beleaguered home furnishings retailer. These plans, which were carried out the day of the filing, resulted in a halving of the BBBY price over the ensuing trading sessions, even as the shares are still double the $5 quotation at which they began the month of August.

Even casual observers of equity markets are likely aware of Bed Bath and Beyond’s struggles as revenue has nearly halved since the pandemic, stores are closing and vendors have grown hesitant to ship merchandise on favorable credit terms. Not exactly a recipe for success from where I sit, with mounting losses making the firm’s survival questionable, even as management was able to secure a nearly $400 million term loan at the 11th hour to keep the music playing a while longer.

There is a “Strategic Update” coming on August 31, but I’ll leave BBBY to the gamblers, instead choosing to focus my attention on battered and bruised stocks of specialty retailers that are making money and returning cash to shareholders, despite results that have disappointed short-term-oriented traders in recent quarters.

One retailer on much more solid footing is Foot Locker FL . Sentiment has weighed on the athletic apparel and footwear merchant since Nike NKE announced that it would double down on its direct-to-consumer efforts, pressuring Foot Locker management to evolve its lineup of merchandise. However, FL beat Street estimates in its latest fiscal second-quarter, posting EPS of $0.99 (vs. 0.83 est.), but arguably what got the stock moving (shares gained 20% on August 19) was the announcement that current CEO Richard Johnson would cede the top spot to Mary Dillon, effective September 1.

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From July 2013 through June 2021, Ms. Dillon served as CEO of Ulta and as a member of its Board of Directors. Under her watch, the beauty chain’s revenue grew more than 12% per year on average, propelling the company’s stock to more than triple in price, with many now thinking she will help do the same at FL.

Of course, given that the shares trade for less than 10 times estimated earnings, any upside from her operating prowess would add meaningfully to my potential total return as the dividend yield is over 4%. It is also nice that she has plenty of levers to pull as the balance sheet is solid enough to facilitate sizable share repurchases.

Kohl’s is another “struggling” retailer, with shares of the department store operator down more than 35% year-to-date. Kohl’s exposure to certain discretionary home goods and apparel has made dealing with inflation a tall task, and top brass recently put the kibosh on any buyout plans, following a strategic review process that began early in the year. However, for all the negativity, the company continues to generate sufficient cash flow to support the dividend, while the balance sheet is in decent shape.

Notably, management said last week that it has partnered with Goldman Sachs to institute a major accelerated share repurchase program (worth $500 million), following through with a previously announced commitment. There is also reason to think Kohl’s growing partnership with makeup brand Sephora will prove fruitful. Indeed, 292 of 400 Sephora stores slated to open in 2022 launched in the latest quarter and plans are in the works to bring a smaller footprint concept to the remaining store base.

True, Kohl’s is now expected to earn “only” $3.09 per share this fiscal year and $3.58 next fiscal year, but the stock trades near $30, putting the forward P/E ratio south of 10. What’s more, the dividend yield is a very generous 6.7% as of this writing.

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I understand that many have diamond hands for BBBY, but I choose to invest and not to gamble. While there is no guarantee that Foot Locker and Kohl’s will prove to be winners, Wall Street historically has offered handsome rewards in the fullness of time to those with well-diversified long-term-oriented portfolios of reasonably priced stocks. Conversely and unfortunately, we know that most come home with empty wallets from a trip to Las Vegas.

YOLO, but forget BBBY and HODL to FL and KSS, two retailers with EPS and DY!