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Retail Stocks Tumble — Time to Buy, or Bail?

Walmart, Macy’s, Target and other retail stocks have given up serious ground in August

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The past several days haven’t been especially kind to the market. The S&P 500 is off nearly 4% since its early August peak, and as of Wednesday’s action, it looks poised to enter a “from bad to worse” situation.

As rough as it has been for the broad market, though, it’s been significantly worse for one group in particular: retail stocks. Some of the industry’s biggest names — spanning from discounters like Walmart (WMT) to upper-end names Macy’s (M) — have taken on more than their fair share of water since the end of July. Walmart shares are off 6.6%, for instance, while Macy’s is down 10% from its early-July peak. JCPenney (JCP) and Target (TGT) have both been drubbed lately as well, fueled by disappointing results and/or disappointing outlooks.

Is the industry really in this much trouble, or are investors overreacting and ultimately setting up a buying opportunity in retail stocks?

Target’s Numbers a Microcosm … Mostly

Truth be told, though they’ve been hammered this month so far, retail stocks had at least a small shot at shrugging off this wave of weakness and getting back into a groove. That is, until Wednesday. That’s when Target — arguably one of the more reliable names in the retail bunch when it comes to predictable growth — posted its Q2 results and outlook.

The second-quarter numbers were actually pretty good. Target earned an operating profit of $1.19, up from last year’s $1.06. Sales were up 2% overall, and higher by 1.2% on a same-store-sales basis. Problem: The pros were looking for a bigger top line, and stronger same-store-sales growth.

It was the guidance that really kick-started the 4% plunge for TGT shares, however. The retailer now expects a per-share profit of only 80 to 90 cents in the third quarter, vs. previous analyst estimates of 89 cents, and for the full year, Target projects per-share profits to come in between $4.70 and $4.90, down from the previous outlook of $4.85 to $5.05 per share.

Target’s guidance put the exclamation point on a sizable slew of other red flags retail stocks began waving during the now-ending earnings season.

Walmart, of course, is the most-watched of those struggling stores. Though it met earnings estimates of $1.25 for the second quarter, following Q1’s miss, a mere “meet” wasn’t enough to stoke potential or current investors, especially when revenue was shy of forecasts. Walmart opined it was a combination of a tepid economy and higher payroll taxes that sapped business — a theory echoed by Target as well as a few others.

The problem might be bigger than the impact of slightly higher payroll tax rates, though, which should crimp lower-income consumers more so than high-end spenders. Ralph Lauren (RL) and Coach (COH) each reported poor numbers for last quarter. Coach’s revenue fell short of expectations, and Ralph Lauren’s same-store sales fell 1%. Both also reported fading foot traffic in its stores.

Macy’s numbers were similarly disappointing, but Macy’s might well have its consumer-understanding finger right on the pulse of the problem.

Article printed from InvestorPlace Media,

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