Earnings Watch: 5 Crummy Retail Stocks on Deck

by Dan Burrows | May 19, 2014 12:28 pm

Earnings Watch: 5 Crummy Retail Stocks on Deck

First-quarter earnings season sure didn’t save the best for last.

down arrow Earnings Watch: 5 Crummy Retail Stocks on Deck[1]Reporting season is coming to a close, which means it’s time for the last of the retail stocks to release quarterly results. And considering a number of the most troubled retailers are on the docket, expect ugly to reign supreme.

True, terrible winter weather took a toll on retailers and retail stocks. But tepid demand — especially amid lower-income consumers — is likewise pressuring revenue. Just look at what happened at Walmart (WMT[2]) in the first quarter. As bad as the weather was, it’s the almost-stalled pace of economic recovery that’s the real threat to retailers’ businesses.

The blended earnings growth rate for the retail sector is projected to be less than 2% in the first quarter, according to data from FactSet. Of the 13 retail subsectors, only four are expected to post year-over-year profit growth.

So it’s almost fitting that this week brings earnings from some of the most challenged retail stocks. From office supplies to teen fashion, here’s a look at five struggling retailers and what to expect from earnings:

Staples (SPLS)

StaplesLogo Earnings Watch: 5 Crummy Retail Stocks on Deck[3]Staples (SPLS[4]) reports first-quarter earnings Tuesday morning, and for the sake of anyone holding SPLS stock, the company had better offer up some positive surprises. SPLS stock is down 17% year-to-date.

Office supply retailers have long seen their market eroded by online rivals, notably Amazon (AMZN[5]). That’s why Office Depot (ODP[6]) merged with OfficeMax last year.

That all adds up to more pain for SPLS stock.

Staples earnings are forecast to fall to 21 cents a share from 26 cents a year ago, according to Thomson Reuters. Revenue is projected to fall 3.4%.

And that’s the way it looks to be for a long time. SPLS is expected to suffer declining sales and profits through 2015 at least.

A beat-and-raise quarter sure would help SPLS stock, but that might be too much to wish for.

American Eagle Outfitters (AEO)

AmericanEagle Earnings Watch: 5 Crummy Retail Stocks on Deck[7]American Eagle Outfitters (AEO[8]) releases results Wednesday before the bell, and the market expects more ugliness on the top and bottom lines.

Like most teen retailers, American Eagle and AEO stock never really recovered from the recession, proving that it’s not just lower-income folks who are struggling. AEO stock is down 18% for the year-to-date and a staggering 40% over the past 52 weeks.

If nothing else, at least AEO issued such a negative forecast that it should be able to beat it. Same-store sales are projected to decline in the high single-digits. Analysts, on average, forecast AEO to breakeven in the quarter, down from 18 cents a year ago. Sales are seen falling 4.5%.

Even without the harsh winter weather, American Eagle was getting hammered by macroeconomic factors and higher costs. True, AEO can do something about costs, but the weak recovery is out of its hands and that portends more weakness ahead.

Best Buy (BBY)

Best Buy Earnings Watch: 5 Crummy Retail Stocks on Deck[9]Best Buy (BBY[10]) earnings come Thursday, and investors will be hoping for something to snap BBY stock out of its hangover. After jumping more than 235% in 2013, BBY stock is off 36% so far in 2014.

But like Staples, Best Buy and BBY stock are getting hurt by Amazon — and there’s only so much the specialty electronics retailer can do to fight back.

As we noted last quarter, BBY has an unsustainable model [11]for turning itself around. Cost cuts will only get you so far as long as sales keep falling.

All consumer electronics retailers had a terrible start to the year, in part because of the weather, but the lack of any new must-have gadgets is also to blame. So much for top-line growth.

Best Buy is projected to report earnings of 20 cents a share, down from 32 a year ago. Meanwhile, revenue is expected to fall 2%.

BBY will get high marks for its expense reduction, but that’s about it.

Sears Holdings (SHLD)

Sears185 Earnings Watch: 5 Crummy Retail Stocks on Deck[12]Sears Holdings (SHLD[13]) looks like it’s going out of business[14], and there’s no reason to think earnings — released Thursday — will change the outlook. SHLD stock is essentially flat for the year-to-date, but that decent performance is due to the market’s valuation of its real estate assets — not its operations.

Sears is bleeding cash and slowly dismantling itself, selling every part of the company it can. Most recently, SHLD said it wants to sell its stake in Sears Canada.

This slow-motion liquidation sale won’t boost revenue, not when SHLD closed 100 stores over the last year.

No surprise here: SHLD earnings are going to be terrible. Its loss is forecast to widen to $1.77 a share from $1.54 last year. Sales are expected to decline more than 8%.

Sears is burning through cash, posting losses and getting smaller. There’s no reason to hold SHLD stock.

Aeropostale (ARO)

AEROPOSTALELOGO Earnings Watch: 5 Crummy Retail Stocks on Deck[15]Aeropostale (ARO[16]) is another teen retailer that never came back from the last recession. But as Thursday’s results will show, Aeropostale and ARO stock are in much deeper trouble than American Eagle.

ARO stock is off more than 50% for the year-to-date alone, and 70% over the past 52 weeks. Meanwhile, Aeropostale is closing stores and cutting employees, but it remains to be seen whether its new strategy can work. Aeropostale, which is currently dependent on mall traffic, wants to focus on off-mall locations, international operations and e-commerce.

Good luck with that.

Wall Street expects ARO to post a much wider loss this quarter: 70 cents vs. a loss of 16 cents a year ago. Sales are tumbling and will continue to do so. Revenue is forecast to drop 10% year-over-year. If Aeropostale can turn itself around before it runs out of cash, there will be big upside in ARO stock.

Unfortunately, bankruptcy looks like the more likely outcome.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2010/11/down-arrow.jpg
  2. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  3. [Image]: http://investorplace.com/wp-content/uploads/2010/10/StaplesLogo.jpg
  4. SPLS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPLS
  5. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  6. ODP: http://studio-5.financialcontent.com/investplace/quote?Symbol=ODP
  7. [Image]: http://investorplace.com/wp-content/uploads/2012/02/AmericanEagle.jpg
  8. AEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEO
  9. [Image]: http://investorplace.com/wp-content/uploads/2011/07/Best-Buy.jpg
  10. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  11. unsustainable model : http://investorplace.com/2014/02/bby-stock-best-buy-stock/
  12. [Image]: http://investorplace.com/wp-content/uploads/2012/10/Sears185.jpg
  13. SHLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHLD
  14. looks like it’s going out of business: http://investorplace.com/2014/05/shld-stock-sears-holdings-eddie-lampert/
  15. [Image]: http://investorplace.com/wp-content/uploads/2013/09/AEROPOSTALELOGO.jpg
  16. ARO: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARO

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