Weak Consumer Spending Claims Another Corporate Victim
2014 has not been a good year for retailers. The SPDR Retailer ETF (NYSEARCA:XRT) has declined for the year, and it has underperformed the S&P 500 by about 7 percent. What’s more, we have seen the bottom fall out of several retail stocks, from Dick’s Sporting Goods (NYSE:DKS) to Whole Foods (NASDAQ:WFM) to seemingly everybody’s favorite: Amazon (NASDAQ:AMZN). It’s not helping that we are seeing weak consumer spending numbers, which were flat in April and up just 0.2 percent in May. Now we have a new casualty to add to the list: Bed Bath & Beyond (NASDAQ:BBBY).
Bed Bath & Beyond is a great example of why retail stocks are generally difficult to play. The company missed on earnings expectations by a penny per share, and it missed on revenue expectations by about 1 percent. It lowered its guidance for the next quarter to $1.08 per share to $1.16 per share, which isn’t that short of analyst expectations of $1.20 per share. Still, the stock tanked 8 percent on Thursday, and it is down 30 percent for the year.
Retailers, and in particular specialty retailers like Bed Bath & Beyond, are valued by analysts who take past figures and project them into the future. So if a company’s sales and profit growth are accelerating, then this acceleration is assumed to continue. This is how we get retailers that trade at seemingly absurd valuations, such as Whole Foods prior to its 2014 decline. But when these retailers start to report decelerating sales and profit growth, this deceleration is projected into the future; decelerating sales growth eventually leads to declining sales, and suddenly these stocks are worth far less.
Whether this is the correct way to analyze these companies doesn’t matter. What does matter is that this is how they are valued, and it follows that small declines in forward earnings guidance, such as with Bed Bath & Beyond, lead to radical reductions in earnings forecasts and subsequent stock revaluations.
Given this, I think Bed Bath & Beyond is simply a dangerous stock to own unless you have some real insight that strongly indicates the company’s decelerating sales growth will reverse course. But we have seen a barrage of weak economic and retail numbers that point in precisely the opposite direction.
While the view from the Fed and economists is that the first-quarter 2.9 percent GDP decline was an aberration, there is no evidence that this is the case, especially since we have continued to see weak retail sales and consumer spending figures in the second quarter, as mentioned above.
This doesn’t mean that people will stop buying things, but they are more likely to save and spend less on non-essential items, and this doesn’t bode well for a company like Bed Bath & Beyond, which sells non-essential home furnishings that can be purchased inexpensively at a discount retailer like Wal-Mart (NYSE:WMT).
With the prospect of declining sales for non-staple retailers, Bed Bath & Beyond’s tempting 11 price-to-earnings multiple should be avoided. In fact, for the time being, the entire retail space should be avoided, as these companies are highly leveraged to even small changes in consumer spending, and there have simply been too many cases of retail stocks losing a substantial amount of value on bad news that could have easily been a statistical anomaly.
Investors who must be in the space should either have unique insight into the company that isn’t readily available to Wall Street, or they should focus on companies that outperform in these lean times, such as dollar stores and big-box retailers like Wal-Mart.
Disclosure: Ben Kramer-Miller has no position in Bed Bath & Beyond or in any of the companies mentioned in this article.