The market has been quiet the past few weeks. Volatility did spike a bit toward the end of August, but it still sits near historic lows. The Dow Jones Industrial Average sits at an all-time high, but it is still up just 0.4% from early August levels.
U.S. stocks feel like they’re still stuck in the late-summer doldrums, with the beginning of earnings season more than a month away. But there still are a few key companies reporting earnings next week. Three of them are dealing in various ways with the various challenges in the retail industry being quickly and dramatically altered by Amazon.com, Inc. (NASDAQ:AMZN).
For each company, next week’s reports are reasonably significant. But the significance of these earnings releases goes beyond the individual stocks. The lessons drawn from all three will give investors a clue as to the health of U.S. retail as a whole, and a better understanding of how that dynamic market is shifting at the moment.
Those lessons could be key ahead of the coming earnings season — and then the always-important holiday period. Without further ado, here are three earnings reports to watch next week.
Earnings Reports to Watch: Bed Bath & Beyond Inc. (BBBY)
The chart of Bed Bath & Beyond Inc. (NASDAQ:BBBY) looks like that of so many brick-and-mortar retailers over the past few years. Ugly. BBBY stock has lost one-third of its value in the last year. It’s down 55% over the past three years.
Those declines make BBBY stock look cheap. The consensus Wall Street earnings-per-share estimate for fiscal 2017 (ending February 2018) is $4.02, giving BBBY stock a price-to-earnings multiple just above 7. And I can see why there might be a contrarian case for BBBY, particularly at levels since just after the financial crisis.
After all, the sheets, towels and home décor items sold at Bed, Bath & Beyond are easier to sell in-person, when a customer can touch and feel the products. Sales of those online products are shifting online, but Bed, Bath & Beyond is following that trend. Digital sales grew more than 20% in fiscal 2016, and again in Q1, helped in part by several small e-commerce acquisitions.
Overall, comparable sales haven’t been that bad, declining 0.6% in FY16 after a 1% increase the year before. And expectations are low, with consensus EPS estimates for Q2 of $0.71, a 16.5% decline year-over-year.
But the lesson of retail over the past few years has been that low P/E multiples don’t make a cheap stock. And BBBY’s Q2 report on Tuesday afternoon is shaping up to be a potentially explosive report.
Bed, Bath & Beyond already missed Q1 earnings badly, with a 2% decline in same-store sales and a 27% drop in adjusted EPS sending the stock down 12%. Meanwhile, it will announce full-year guidance after the Q2 numbers. Another miss will add to the narrative that declines are accelerating. Combining a Q2 miss with guidance that disappoints the Street easily could cause another double-digit drop in the stock.
All told, it simply looks like it’s too early to time the bottom — either in brick-and-mortar retail or in BBBY.
Earnings Reports to Watch: AutoZone, Inc. (AZO)
Auto-parts retailers like AutoZone, Inc. (NYSE:AZO) were supposed to be protected from the e-commerce threat — if not actually benefit from it.
While brick-and-mortar retailers elsewhere were plunging in 2015 and 2016, AutoZone and peers O’Reilly Automotive Inc (NASDAQ:ORLY) and Advance Auto Parts, Inc. (NYSE:AAP) held up just fine. AZO stock, in fact, hit an all-time high toward the end of 2016.
The narrative has changed dramatically in 2017, one reason I recommended my subscribers sell ORLY in late June, just ahead of its disappointing fiscal Q2 report in early July. AutoZone itself missed Street estimates in its fiscal Q3 report in May, and Advance Auto completed the trifecta with a big Q2 miss in mid-August.
But there’s reason to see a glimmer of hope for AZO ahead of the fiscal Q4 report before the open on Tuesday. AZO shares bottomed out just below $500 with support holding until a recent rebound into Tuesday’s report. At under 13x FY17 EPS, AZO looks reasonably cheap — and much cheaper than either ORLY or AAP.
The Q4 report is a big one for AutoZone. A strong sales number and progress in managing higher expenses from new distribution centers can change the narrative here. With the stock still down 28% in 2017, expectations are low. A nice beat, and a good outlook, from AutoZone could send AZO soaring — and take ORLY and AAP with it.
Earnings Reports to Watch: FedEx Corporation (FDX)
On the other side of the coin is FedEx Corporation (NYSE:FDX), which has benefited from the same e-commerce trends impacting BBBY and AZO.
FedEx’s Q2 report after the close on Tuesday isn’t likely to produce much in the way of fireworks. The Street is looking for solid, but reasonable growth YOY: 8% in EPS and 5% in revenue. The post-earnings call may actually be more interesting to investors, given that FDX will give its outlook for the holiday season.
That outlook might not move FDX stock all that much, but it could move others. After all, it will say a lot about how one of the world’s premier logistics companies sees this year’s key shopping season, from both an overall market standpoint and in terms of how much more share e-commerce will take. That could be a key piece of data for investors looking to understand how the rest of the year will play out — both in retail and the market as a whole.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
