Like Bed Bath & Beyond? This Turnaround Stock Is Far More Promising

Retail investors who followed high-profile investor Ryan Cohen into Bed Bath & Beyond (BBBY 5.94%) were left sorely disappointed when he revealed that he had sold his entire stake in the company — 9.4 million shares plus options. The about-face by the founder and former CEO of Chewy and chairman of GameStop was abrupt, as Cohen owned about 10% of the company.
It was only in March that Cohen had pushed to gain three new seats on the board of directors. Cohen’s call options with far out-of-the-money strike prices of $60 to $80 had some investors excited that shares of the beleaguered home goods retailer could make a run to that level. But with the stock down big over the past week, shareholders are stuck holding the bag without a lot left to be excited about right now.
Instead of trying to trying to parse out the moves of a high-profile but fickle investor, folks who are interested in a turnaround story are better served taking a look at shares of Foot Locker (FL -3.19%), a retailer with some intriguing catalysts of its own — and a lot more potential than Bed Bath & Beyond.

Image source: Getty Images.

The big catalyst — a new CEO
Shares of Foot Locker got a major boost when the company announced that Mary Dillon, the former chief executive of Ulta Beauty, would be taking over as CEO in September.
Dillon did a phenomenal job at Ulta — the stock tripled during her tenure, the company doubled its store count, and it successfully reinvented itself as an omnichannel destination for health and beauty products with a successful e-commerce strategy. When Dillon started, e-commerce sales only made up 4% of Ulta’s total sales, but by the time she left in 2021, e-commerce accounted for nearly one-third. Dillon will doubtlessly prioritize increasing Foot Locker’s online presence and e-commerce prowess. 
Like Bed Bath & Beyond, Foot Locker is not without its challenges. Dillon will have to navigate through the company’s relationship with Nike. Nike products accounted for 70% of Foot Locker’s merchandise purchases last year, indicating that the company may be too reliant on the maker of athletic wear, especially at a time when Nike is increasingly shifting toward its own direct-to-consumer sales channels.
While Dillon will likely work to diversify and reduce Foot Locker’s reliance on Nike, it’s also possible that these fears are somewhat overblown — Nike has already cut ties with many retailers over the last few years, including several large, traditional sporting goods chains. Nike even went as far as to stop selling on Amazon. Foot Locker has so far survived this culling of the herd, which perhaps indicates that Nike values the relationship between the two companies. 

Valuation and fundamentals
Foot Locker and Bed Bath & Beyond are both dealing with challenges. But these headwinds are reflected in Foot Locker’s stock price. Even after a 54% rally off of its 52-week low, the shares look attractively valued at just under five times earnings. 
You can’t really make the same argument for shares of Bed Bath & Beyond because the company isn’t profitable, so there are no earnings. I have no problem buying shares of an up-and-coming tech or software company that isn’t yet profitable in the right situation, but buying a retailer like Bed Bath & Beyond that has been around for over 50 years and isn’t profitable is a lot less palatable. 
Plus, Foot Locker pays an attractive dividend that yields over 4%. Bed Bath & Beyond last paid a dividend in 2020 and is very unlikely to resume paying one anytime soon given the company’s tenuous position. 

Buy Foot Locker, forget Bed Bath & Beyond
Recently, Bed Bath & Beyond shares were rallying because the company secured a loan so that it could get shipments of merchandise from vendors. While this may provide some short-term relief, the fact that vendors weren’t confident enough in the company’s financial position to send it merchandise is clearly not a good harbinger for the long term. 
On the other hand, Foot Locker faces no such existential issues. The company has some challenges and is in need of a turnaround, but it is profitable and attractively valued, all while paying a dividend. Best of all, its new CEO has an impressive track record and should be able to steer Foot Locker in the right direction. 
For investors looking for a turnaround story that they can get behind over the long term, Foot Locker looks like a far superior investment to Bed Bath & Beyond.  

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Michael Byrne has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Chewy, Inc., Nike, and Ulta Beauty. The Motley Fool recommends Foot Locker. The Motley Fool has a disclosure policy.

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