We are now at the tail-end of arguably the most important earnings season ever. The novel coronavirus pandemic swept across the globe for months and brought the global economy to a screeching halt. This earnings season represented the first time that investors heard from corporate America on how business fared during this shut down.
The question on everyone’s mind: how bad was it? In short, bad — but not as bad as feared.
About 90% of companies in the S&P 500 have reported first quarter earnings so far. The bad news? Earnings fell 14% year-over-year. That’s the biggest decline since 2009.
The good news? About two-thirds of companies actually reported earnings above estimates, while half of the companies that issued guidance for Q2 issued positive guidance.
In other words, first quarter earnings were bad, but largely better than expected, and second quarter earnings also may not be as bad as feared. That’s largely why the stock market has surged in May to its highest levels since the Covid-19 crisis emerged.
Having said all that, a few companies did get killed by the coronavirus pandemic this earnings season. Their stocks didn’t go higher. They went the opposite way.
For some of these falling stocks, it’s time to buy the dip. For others, they’re stocks to sell.
To know the difference, look at these seven sluggish stocks that got hit hard by coronavirus this earnings season:
- Blue Apron (NYSE:APRN)
- Kohl’s (NYSE:KSS)
- Crocs (NYSE:CROX)
- Urban Outfitters (NASADQ:URBN)
- Under Armour (NYSE:UAA)
- Disney (NYSE:DIS)
- 8×8 (NYSE:EGHT)
Blue Apron (APRN)
Meal-kit maker Blue Apron has been pegged as a “coronavirus winner” as demand for the company’s meal-kits is projected to surge amid widespread restaurant closures and some fear that grocery shopping is a health risk.
But first quarter numbers didn’t live up to the hype, and APRN stock plunged in response. More than anything else, this sell-off seems like a buying opportunity.
Sure, first quarter revenues were up “just” 7% from the fourth quarter. But those numbers miss the huge demand surge the company saw in April. Through the first three weeks of April, Blue Apron meal-kit demand rose 27% relative to the first three weeks of March. That’s why management is guiding for second quarter revenues to rise 30%.
In other words, the best of the Covid-19 surge in Blue Apron demand trends is yet to be reflected in the numbers. Perhaps even more importantly, this demand surge lays the groundwork for increased word-of-mouth marketing and network effects to drive a permanent acceleration in the company’s growth trajectory over the next few years.
Such an acceleration will push APRN stock materially higher here. As such, I’d be a buyer on recent earnings weakness in APRN stock.
Off-mall retail giant Kohl’s was supposed to report bad numbers this quarter thanks to the coronavirus pandemic shutting down the physical retail world in March and April.
But when the company finally updated investors in its first quarter earnings report, the numbers were shockingly bad. Net sales dropped 43.5% year-over-year. Gross margins fell by more than 20 percentage points. What was a sizable adjusted net profit in the year ago quarter, swung to a wide net loss this quarter.
KSS stock plunged 10% after the print, bringing shares more than 60% off their pre-Covid-19 levels. Zooming out, though, this sell-off may be a golden buying opportunity.
It appears the worst is over for Kohl’s. The retailer closed all of its stores on March 20 and remained closed through April. But starting in early May, amid broader re-opening measures across America, Kohl’s started to re-open stores. Since May 4, the company has opened 50% of its stores across the U.S.
More states will hop on the re-opening bandwagon over the next few months. As they do, more Kohl’s stores will open, and those stores will get busier and busier. Kohl’s growth trends will gradually improve throughout the second, third, and fourth quarters — powering a big rebound rally in KSS stock from here into the end of the year.
Sandal footwear maker Crocs wasn’t supposed to report strong first quarter numbers. After all, after Covid-19 came marching into town, the global economy shut down. Crocs stores everywhere were closed. Consumers were told to stay home. Consumer spending dried up.
Crocs didn’t report good first quarter numbers. The Crocs growth narrative — which was previously red-hot on the back of the “ugly” fashion trend — fell flat, with the company reporting negative revenue growth in the first quarter of 2020 for the first time since 2017.
But here’s the good news. The “ugly” fashion trend is alive and well. Crocs has become an instant stay-at-home favorite that has been trending all over social media. The company was one of the only brands to report positive revenue growth in North America in the first quarter of 2020. Domestic and international Google search interest related to “Crocs” surged to all time highs in March/April 2020. And Crocs.com web traffic is surging.
In other words, the Crocs growth narrative today is actually still red-hot. Retail sales are just down big. Once retail sales bounce back — and they should in the coming months — the Crocs growth narrative will fire on all cylinders again.
As that happens, CROX stock could return to $40-plus levels.
Urban Outfitters (URBN)
Mall retailer Urban Outfitters was supposed to have an awful first quarter. But the numbers were much worse than anyone expected.
Net sales in February, March, and April dropped 32%, paced by a 28% drop in comparable sales. The gross margin rate fell to a measly 2% (from 31% in the year ago quarter), and gross profits plunged 96% year-over-year. Worse yet, operating expenses fell by “only” 8%, so Urban Outfitters experienced significant opex deleverage. The expense rate ballooned from 27% a year ago, to 36%.
Ultimately, what was a small profit a year ago, turned into a wide loss of greater than $100 million this quarter. URBN stock tanked to near decade lows after the print.
But management did report on the conference call that its stores are reopening and that traffic and sales trends are gradually improving. These improvements should persist for the balance of the year, amid more aggressive reopening measures across the U.S. As they do, depressed URBN stock could bounce back.
Under Armour (UAA)
Under Armour’s first quarter earnings report, delivered in early May, was horrendous.
On a constant-currency basis, total company revenues fell 22%, paced by a 28% drop in North America sales and an 11% drop in International sales. Margins came under significant pressure thanks to weak sales and negative operating leverage. What was a sizable profit in the year ago quarter, turned into a wide loss this quarter. Management also sounded a rather cautious tone about April and May sales trends, and said that Q2 revenues could be down as much as 60%.
But this certainly feels like rock bottom for Under Armour. In the coming months and quarters, the global economy will gradually re-open. Consumer activity will normalize. Under Armour stores will re-open. Sales trends should bounce back. Margin erosion will be less severe. Profit trends will gradually improve.
As all of that happens, I’m cautiously optimistic that UAA stock can stage a big rebound, meaning that more than anything else, the first quarter sell-off is a longer-term buying opportunity.
As expected, Disney reported second quarter earnings in early May that were pretty bad.
Yes, the Direct-to-Consumer (DTC) business was red-hot in the quarter. Paced by huge subscriber growth across Disney+, ESPN+, and Hulu, Disney’s DTC revenues rose 260% year-over-year.
But, everywhere else, the numbers weren’t so great. Parks revenue dropped. Margins got killed. Pre-tax profits fell 85%. Net profits were decimated. Free cash flow fell 30%.
Don’t worry. All of these trends will reverse course. Disney’s parks, retail shops, and restaurants will gradually reopen over the next few months (Disneyland Shanghai is already open). Movie theaters will reopen, too. Pro sports leagues, like the NBA and MLB, will resume, and ESPN/ABC viewership will tick back up.
All in all, Disney’s Covid-19-impacted businesses will meaningfully recover over the next few months amid broader economic normalization. As they do, DIS stock will rebound.
Last, but not least, on this list of stocks that got hit hard by the coronavirus pandemic this earnings season is 8×8.
A cloud communications provider, 8×8 was supposed to benefit in a big way from work-from-home tailwinds amid Covid-19. The company did. To an extent. Revenues rose 30% year-over-year in the fourth quarter of 2020.
But expenses rose by more, and net loss widened versus the year ago period. EGHT stock plunged.
This is not a new trend for 8×8. Since 2017, the company’s revenues have risen 75%, but expenses have risen 85%. Net loss has widened significantly.
The big problem here is that while 8×8 has huge tailwinds in the cloud communications market, this market is also very crowded, with a lot of competition from Microsoft (NASDAQ:MSFT), Zoom (NASDAQ:ZM), Alphabet (NASDAQ:GOOG), Slack (NYSE:WORK), and many more. The only way 8×8 is keeping pace with that competition is by spending an arm and a leg.
Of course, that’s unsustainable when the company is running net losses. So until management fixes its spending problem, I’d be cautious with EGHT stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long MSFT.