2 Retail Debacles: Why the Sector Remains Risky

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Readers of my articles are well aware that I have been warning repeatedly that investors should stay away from retailers, or at the very least, that investors should be very selective and only invest in ultra-safe “best of breed” retailers such as Wal-Mart (NYSE:WMT).

On Tuesday, several retailers reported earnings. While a couple of reports were fairly positive (e.g., Home Depot (NYSE:HD)), two companies came out with earnings reports that reaffirm my conviction: stay away from retailers unless they are defensive, “best of breed names.” The two stocks I have in mind are Dick’s Sporting Goods (NYSE:DKS), which fell 18 percent, and Staples (NASDAQ:SPLS), which fell 12.5 percent. Let us look at both earnings results to see why investors sold off shares so aggressively.

Dick’s reported earnings that weren’t that bad on the surface. The company reported EPS of 50 cents per share versus analyst estimates of 52 cents per share, which is a miss, but it is hardly more than a rounding error. Furthermore, net sales increased by 7.9 percent, which isn’t bad considering that we saw essentially flat retail sales in the U.S. in April. While margins weakened, this is common nowadays for the industry. However, investors were concerned with the company’s guidance.