Two specialty retailers recently reported earnings, Lululemon (LULU - Get Report) and Bed Bath & Beyond (BBBY - Get Report). Bed Bath & Beyond reported Wednesday after the close. Both companies disappointed investors and both experienced margin pressure, but only one, Lululemon, is a buy because, among other reasons, it is a potential takeover target.
Here's why it's time to cut Bed Bath & Beyond loose and use the capital to buy Lululemon (or another appropriate stock) for your portfolio. I'll explain why using Whole Foods Market (WFM), another retailer, albeit in food, as a road map investors can use to anticipate the trajectory of Bed Bath & Beyond's stock.
At first glance, the similarities between Whole Foods and Bed Bath & Beyond may not be readily apparent because two entirely different products are sold, and the only commonality is food bought at Whole Foods can be prepared using Bed Bath & Beyond kitchenware.
However, if you look at the two companies through the eyes of Sears, Walmart, and Target, the only difference between the products sold at Whole Foods and Bed Bath & Beyond is the SKU number. Sears/Kmart, Walmart and Target sell everything from avocados to zero-turn lawnmowers. The big three retailers are in a constant state of inquiry to find products -- almost any products -- with higher margins to replace lower-margin items.