Retail stocks got hammered in late May amid a flurry of bad earnings reports. Broadly, those bad reports confirm that while parts of the retail world have adjusted to the e-commerce shift and are now growing with the digital trend, there remain a handful of retailers that simply haven’t adjusted as well.
Those retailers continue to struggle in the face of more digital competition. As a result, their stocks are getting punished by Wall Street this earnings season.
But, not all of these retail stocks are lost causes. Some retail stocks that got killed this earnings season are actually worth looking at as potential dip buys here.
Why? Because while digital retail is growing, physical retail isn’t dead. As such, physical retailers with strong brands and which dominate in certain secular appeal niches will continue to grow over the next several years. Thus, when the stocks of these retailers get hammered, they are usually good buys.
But, not all retail stocks that got killed this earnings season fall into that category. For some, a bad start to 2019 is just part of a broader secular demise in the company.
With that in mind, I’ve put together a list of five retail stocks that got killed this earnings season, and looked at where they are going next.
The Reason: Q1 earnings, revenue and comparable sales growth all missed estimates. The retailer also slashed its full-year revenue and profit guides to well below consensus levels.
Shares of Nordstrom (NYSE:JWN) tanked in late May after the mall stalwart reported first-quarter numbers that — quite frankly — couldn’t have been worse. Comparable sales fell by much more than expected. Revenues missed expectations. Gross margins dropped substantially. The expense rate rose due to sales deleverage. Profit margins compressed meaningfully. Profits missed expectations. The full-year sales and profit guides were cut to well below consensus levels.
Broadly, it was just an awful report.
But, it looks like Nordstrom just made some execution errors in early 2019. Specifically, the company over-focused on building out a new loyalty program, and under-focused on growing through digital marketing. But, the new loyalty program was a flop due to some execution issues, so the company didn’t get much return from over-focusing on the loyalty program. Meanwhile, they missed out on the digital marketing side, so net net, the company just messed up.
But, Nordstrom has been largely successful in the mall retail scene for several years due to its unique niche of servicing high-end fashion. This niche has staying power. Thus, Nordstrom will bounce back from early 2019 headaches, and rally from here.
The Reason: Q1 profits and comparable sales growth missed estimates by a wide mark. The retailer also sharply cut its full-year profit guidance.
Shares of off-mall department store giant Kohl’s (NYSE:KSS) dropped sharply this earnings season after the company reported first-quarter numbers that, much like Nordstrom’s numbers, were nothing short of disastrous. Not only did revenue growth and comparable sales growth both miss expectations, but they both also dropped into negative territory. Gross margins fell after several quarters of expanding. The expense rate rose by a bunch after several quarters of only moderate growth. The full-year profit guide was slashed.
Overall, it was a bad quarter. Kohl’s blamed the bad quarter on adverse weather conditions, soft home sales, and poor marketing spend. The good thing is that the weather started to turn around in March and April, and as it did, apparel sales started to bounce back. Further, with respect to marketing, the company is going to be more aggressive on pricing and promotions (as opposed to marketing) to drive sales, and considering Kohl’s is a destination where price matters, this investment shift should yield positive results.
Net net, the quarter was bad for Kohl’s, but the company remains healthy long term. This company dominates the off-mall, off-price niche, and has multiple valuable partnerships with Amazon (NASDAQ:AMZN), which should help stabilize sales both soon and in the long run. Stabilization isn’t priced into KSS stock. As such, this stock should bounce back from here.
J.C. Penney (JCP)
The Reason: The retailer reported a wider than expected loss in Q1, alongside weaker than expected comparable sales growth.
The dead duck that is J.C. Penney (NYSE:JCP) put up another dead duck quarter this earnings season. The company reported a wider than expected loss in its first-quarter earnings report, amid continued margin erosion. Meanwhile, comparable sales growth continues to be hugely negative, and far worse than what mall retail peers are reporting.
In other words, JCP continues to be the eyesore of a struggling retail industry with industry-worst comparable sales growth and eroding margins. These trends have persisted for a long time, and they aren’t going anywhere anytime soon. The retail world — and the consumer — have moved on from JCP, and it’ll be near impossible for this company to regain relevance because it has been straddled with so much debt on the balance sheet.
As such, this stock is headed for the retail graveyard. There’s no reason to try to step in the way of this secular demise.
Urban Outfitters (URBN)
The Reason: Despite topping Q1 estimates, the company missed margin expectations in the quarter and expects further margin pressure for the foreseeable future as new business initiatives ramp.
Shares of mall retailer Urban Outfitters (NASDAQ:URBN) dropped in a big way in late May despite reporting first-quarter numbers which broadly topped expectations, including a top- and bottom-line beat. At issue were margins. Margins were down in the quarter, and are expected to be lower for the foreseeable future as the company invests in its new clothing rental subscription service, Nuuly. Alongside weak numbers everywhere else at the mall, URBN stock dropped in response to Q1 earnings.
But, these near-term margin hits are absolutely necessary because Nuuly is a step in the right direction for Urban Outfitters. Subscription rental models are the future of retail, since they optimize consumer convenience (consumers don’t have to worry about going to a store and getting new fashion items every month) and make consumer costs more predictable (consumers pay a set dollar amount every month, so there’s no volatility in payments). That’s why subscription retail rental models like Rent The Runway and Stitch Fix (NASDAQ:SFIX) have been all the craze in retail lately.
Now, Urban Outfitters is immersed in that trend. That’s a very good thing long term. Thus, any near-term margin hit is totally worth it, and buying into weakness related to those margin hits seems like the smart long-term move.
The Reason: The home improvement retailer reported a wide first-quarter earnings miss as the result of heavy gross margin contraction, which is broadly expected to persist for the foreseeable future and weighed on the company’s full-year profit guide.
Although Lowe’s (NYSE:LOW) top-line numbers were good in the first quarter of 2019, their bottom-line numbers were not. The company reported 3.5% comparable sales growth across its business in early 2019. That’s one of the best comp numbers Lowe’s has reported in a long while, and it was much better than the 2.5% comparable sales increase Home Depot (NYSE:HD) reported in the overlapping period. Thus, Lowe’s is finally starting to win share back from Home Depot in the home improvement space.
But, Lowe’s gross margins were hit hard in the quarter, partially due to increasing costs from tariffs and other transitory factors. Management expects these margin pressures to persist for the foreseeable future. As such, they gave a down-guide for this year’s earnings. Investors were spooked by that down-guide against the backdrop of weak retail earnings reports everywhere. LOW stock dropped hard and fast.
But, in the big picture, Lowe’s goes as the home improvement space goes. That space should continue to grow nicely so long as things domestically remain favorable. Specifically, we need low rates, a healthy labor market and strong consumer sentiment. We have all three right now, and should continue to get all three for a while. As such, this dip in LOW stock looks like an opportunity.
As of this writing, Luke Lango was long JWN, KSS, AMZN, URBN, SFIX and LOW.