Sorry CNBC, but the economy is not improving. Uncertain times lay ahead for the broad retail sector, particularly with ever-whimsical home furnishing stocks, such as Bed Bath & Beyond (BBBY), Pier 1 Imports (PIR) and Williams-Sonoma (WSM).
Earlier in the year, prominent analysts cited the probability of sustained corporate earnings growth and momentum in the underlying economy as reasons why the S&P 500 index could provide 8% returns in 2015 — a not unreasonable target given that the prior year saw the S&P gain more than 12%.
Unfortunately for the blue-chip apologists, the investment strategy division of Goldman Sachs smashed all pretense of optimism with a surprisingly biting analysis.
The renowned financial institution reduced its earnings estimate for the S&P 500 to $109, a decline of 4%. Goldman further forecasted doom for next year’s U.S. gross domestic product, dropping its estimate down to 2.4% — a fairly hefty reduction of 12%. Finally came their bearish prognostication for the year-end point tally of the S&P index itself, a 4.7% drop to 2,000 points.
With Wall Street bracing for an ugly third-quarter earnings performance, home furnishing stocks look highly susceptible to continued underperformance in the markets. Home furnishing stocks have been wildly volatile throughout the year, and the growing pessimism surrounding the economy will not help matters.
Here are the key fundamental and technical reasons that home furnishing stocks may be a sinking ship.
Home Furnishing Stocks to Sell: Pier 1 Imports (PIR)
Don’t let Pier 1 Imports‘ relatively generous dividend yield of nearly 4% fool you. There’s a reason for that high rate, and it has nothing to do with its Martha Stewart–chic decorum.
PIR stock is on life support, and its ridiculously dubious year-to-date performance — losing some 55% of market value — is only the start of a litany of critical predicaments.
A decent-sized chunk of PIR stock’s laggard ways was a result of a single day’s worth of trading. On Sept. 25, PIR stock closed down 12% against the prior session, as investors pummeled the retailer for a dismal second-quarter of fiscal year 2016 earnings performance. PIR stock mustered only a four-cent earnings per share rate, which was 43% below Wall Street consensus estimates. Adding insult to injury, PIR stock’s EPS guidance for Q3 was stated to be in a range between 10 cents to 14 cents — a far cry from analysts’ estimates of 23 cents.
The worst part about PIR stock, though, is its technical volatility. Since the middle of 2013, Pier 1 Imports’ share price has charted a declining wedge pattern, with sharp rallies punctuated by even sharper selloffs. The end result is a chronic series of lower highs and lower lows; and at a current price tag below the $7 level, there’s little to suggest that the bearishness has ended.
PIR stock is easily one of the worst home furnishing firms in business, a point that neither the fundamental picture nor the technical dynamics can counter.
Home Furnishing Stocks to Sell: Williams-Sonoma (WSM)
A cut above the fray in home furnishing stocks, Williams-Sonoma enjoys a decidedly upper-class image. Its brick-and-mortar stores are typically located in premium shopping centers, as opposed to the gaudy strip malls littering America’s urban landscape.
Even the WSM stock price is in positive territory — though barely — on a YTD basis. Sadly, that metric alone won’t save WSM stock from being relegated to the discount dustbin.
The main problem for Williams-Sonoma can be summed up in two words: operating margins. Although WSM stock’s net income figures for Q2 FY2015 were in line with Wall Street estimates, a non-recurring benefit from a favorable income tax adjustment boosted the bottom line. Less impressive, however, was the negative revision for Q3, with WSM stock’s EPS estimates dropping to a range between 68 cents to 73 cents against an original target of 75 cents.
The bearishness stems from a lack of profitability, particularly in Williams-Sonoma’s e-commerce division, where a bulk of its revenues originate. The broader issue of economic slowdown further reinforces the margin-squeeze dilemma.
Technically, the situation hasn’t looked bad for WSM stock until quite recently, with shares charting a bullish trend channel for most of the year. That optimism came to a sudden halt when WSM stock followed the Dow Jones Industrial Average in lockstep to market purgatory in mid- to late August.
Since dropping to a low of $74.64 on the first day of September, WSM stock hasn’t done much of anything at all.
This sets up the possibility that WSM stock is in a consolidation phase just prior to the bears moving in for the kill. With both the broad fundamentals and Williams-Sonoma themselves confirming hesitancy, now is a good time to sit this one out.
Home Furnishing Stocks to Sell: Bed Bath & Beyond (BBBY)
One of the more eclectic names among home furnishing stocks, Bed Bath & Beyond operates a number of stores besides its namesake brand, including popular outings such as World Market and buybuy Baby. Despite its diverse portfolio, however, BBBY stock hasn’t been able to climb out of the doldrums, with shares down nearly 26% YTD and demonstrating little evidence of turning around.
Blame the mixed message sent by BBBY’s latest earnings report. Although BBBY stock’s EPS hit $1.21, matching Wall Street’s expectation and improving 3.4% on a year-over-year basis, revenue failed to meet consensus forecast. Same store sales also fell short of company expectations as a result of unfavorable currency dynamics — a situation that Bed Bath & Beyond believes will continue to negatively impact sales. Further problematic issues arose in the form of gross profit margins, which jumped 38%, primarily due to increased offers and redemptions of coupons.
But the most obvious point of concern for BBBY stock is its technical health.
As noted by Market Realist, BBBY stock has breached all major support lines — against the 20, 50 and 200 day moving averages, Bed Bath & Beyond shares are down an average of nearly 9%. Worse yet, BBBY stock started this week with a brutal 4.4% loss, setting up a long road ahead for regaining credibility in the markets.
Combining a less-than-stellar earnings performance along with broad pessimism for the all-important third quarter, the risk may be too much to justify an investment in BBBY stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.