April was a bad month for retail stocks. Retail sales have been lukewarm in recent months, despite growing evidence that working Americans are enjoying the best job market in years.
The disconnect is perhaps explained by the lack of meaningful wage growth combined with the big bounceback in energy prices over the last few months — putting pressure on consumer pocketbooks.
Retail stocks are losing favor as a result, with the S&P Retail SPDR (NYSEARCA:XRT) down about 4% from its April high after failing last week to cross back above its 50-day moving average — a level that sustained its uptrend out of the October low.
And that may not be the end of retail worries. Here are retail three stocks to avoid.
Retail Stocks: Gap Inc (NYSE:GPS)
On Tuesday, Khaki-and-denim staple Gap Inc (NYSE:GPS) broke down and out of a consolidation range going back to December after investors were disappointed with its April sales and forward guidance.
Net sales dropped 3% to $3.7 billion while comp-store sales dropped 4% vs. a 1% decline in the same period last year. The timing of the Easter holiday was blamed — something it warned of in March. But the struggles for the core Gap brand — which suffered a 10% same-store sales decline — aren’t anything new.
Analysts at FBR Capital downgraded the stock on the expectation the bad news will continue — with inventories high at the end of the first quarter and promotion levels elevated, increasing the risk margins take a hit in the second quarter.
A test of the October low would be worth a 9% drop from here.
Retail Stocks: L Brands Inc (NYSE:LB)
L Brands Inc (NYSE:LB) is the parent company of familiar mall staples such as Victoria’s Secret and Bath & Body Works. At the start of the year, the company operated nearly 2,700 stores throughout the United States with a handful internationally as well.
Like GPS, LB stock is getting hit on April sales numbers: The company reported April comp store sales dropped 1% vs. the 0.1% decline that was expected. Again, the timing of the Easter holiday was blamed. LB stock looks set to test its 200-day moving average for the first time since last August — which would be worth roughly an 11% decline from here.
Retail Stocks: Bed Bath & Beyond Inc. (NASDAQ:BBBY)
Home furnishings retailer Bed Bath & Beyond Inc. (NASDAQ:BBBY) has slipped below its 200-day moving average for the first time since October after it failed to provide an updated outlook (it doesn’t provide monthly sales numbers) as it did last year. Investors are translating the lack of news as bad news.
Back in April, the company reported fourth-quarter results in line with expectations, but guided down first -quarter numbers below consensus, feeding the expectation that the retail is losing traction right now.
If support from the September-October high at $68 doesn’t hold, we could be looking at a drop all the way to $62. That would be worth an 11% decline from current levels.
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