The stock market witnessed a notable shift in the first half of 2022, driven by record-high inflation and a significant rise in interest rates. The Consumer Price Index (CPI) accelerated 9.1% year-over-year in June, exceeding the 8.8% Dow Jones estimate and marking the fastest pace for inflation since November 1981.
Moreover, the persistently high inflation prompted the Federal Reserve to adopt a more hawkish stance toward monetary policy. The central bank raised the benchmark interest rates four times this year, the last two being as high as 75 basis points. The rising rate environment has increased borrowing costs for businesses, leading to economic contraction for two consecutive quarters.
Strong employment data and other positive economic indicators might encourage the Fed to consider bigger interest rate hikes, raising the borrowing costs further.
Thus, we think shares of Carvana Co. (CVNA), Redfin Corporation (RDFN), and Bed Bath & Beyond Inc. (BBBY), which are expected to be affected further by rising borrowing costs, are best avoided now.
Carvana Co. (CVNA)
CVNA operates an e-commerce platform for buying and selling used cars in the United States. The company’s platform enables customers to research and identify a vehicle, inspect it using its 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle, and schedule delivery or pick-up from their electronic devices.
On April 28, CVNA upsized from the previously announced offering size of $2.28 billion and priced the private placement of $3.28 billion in an aggregate amount of its 10.25% senior unsecured notes due 2030. The notes will bear interest at a rate of 10.25% per year, payable semi-annually on May 1 and November 1. The notes offering is expected to increase the company’s debt and interest.
For its fiscal 2022 second quarter ended June 30, 2022, CVNA's gross profit declined 28.3% year-over-year to $396 million. The company’s selling, general, and administrative expenses amounted to $721 million, up 53.4% year-over-year. Its adjusted EBITDA loss stood at $239 million, compared to a $112 million gain reported in the prior-year period.
In addition, the company's net loss and loss per share of Class A common stock came in at $439 million and $2.35, worsening 1,075.6% and 1,003.9%, respectively, year-over-year.
Analysts expect loss per share to widen 388.4% from the prior-year period to $1.86 in its fiscal 2022 third quarter (ending September 2022). Also, the $7.67 consensus loss per share estimate for the current year (ending December 2022) reflects a worsening of 370.6% year-over-year.
The stock has declined 67.9% over the past six months and 80.4% year-to-date to close the last trading session at $46.98.
CVNA’s POWR Ratings are consistent with this bleak outlook. The company has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
CVNA has a grade of F for Sentiment, Quality, Stability, and Growth. Within the F-rated Internet industry, it is ranked #66 of 66 stocks. Click here to see CVNA’s POWR Rating for Momentum and Value.
Redfin Corporation (RDFN)
RDFN is a residential real estate brokerage company that operates in the United States and Canada. The company operates an online real estate marketplace and offers real estate services, such as assisting individuals in purchasing or selling homes and title and settlement services. Also, the company originates and sells mortgages.
In the fiscal 2022 second quarter ended June 30, 2022, RDFN’s gross profit decreased 6.5% year-over-year to $118 million. Its operating expenses increased 23.1% year-over-year to $192.66 million. The company’s loss from operations widened 146.3% from the year-ago value to $74.66 million.
Furthermore, RDFN’s adjusted EBITDA loss amounted to $28.60 million, compared to an adjusted EBITDA income of $2.8 million in the prior-year period. The company’s net loss came in at $78.15 million, worsening 180.3% year-over-year. Its net loss per share attributable to common stock widened 151.7% from the year-ago value to $0.73.
The consensus revenue estimate of $595.09 million for the fiscal 2022 fourth quarter, ending December 2022, represents a 7.5% decline from the same period in 2021. The consensus loss per share estimate of $0.41 for the same quarter represents a widening of 53.2% year-over-year. Furthermore, the company has missed the consensus EPS estimates in each of the trailing four quarters.
The stock has declined 73.3% year-to-date and 82.9% over the past year to close the last trading session at $10.38.
RDFN’s POWR Ratings reflect this poor outlook. The stock's overall F rating translates to a Strong Sell in our proprietary rating system.
RDFN has an F grade for Sentiment and Stability. It has a D for Quality. Within the F-rated Real Estate Services industry, it is ranked #42 of 43 stocks. Click here to access additional POWR Ratings (Growth, Value, and Momentum) for RDFN.
Bed Bath & Beyond Inc. (BBBY)
BBBY operates a chain of retail stores. The company sells a range of domestic merchandise, home furnishings, and other juvenile products. The company owns more than 953 stores and offers its products through various websites and applications comprising bedbathandbeyond.com, bedbathandbeyond.ca, facevalues.com, buybuybaby.ca, and decorist.com.
BBBY’s fiscal 2022 first-quarter results were adversely affected by the ongoing macroeconomic headwinds. The company's Interim CEO, Sue Gove, stated, “In the quarter, there was an acute shift in customer sentiment, and since then, pressures have materially escalated. This includes steep inflation and fluctuations in purchasing patterns, leading to significant dislocation in our sales and inventory.”
In the fiscal first quarter ended May 28, 2022, BBBY’s net sales decreased 25.1% year-over-year to $1.46 billion, and its gross profit declined 44.9% from the year-ago value to $349.31 million. Its operating loss widened 371.9% year-over-year to $339.16 million. Its adjusted EBITDA loss stood at $223.54 million, compared to an $86.07 million gain reported in the prior-year period.
In addition, the company's net loss and loss per share came in at $357.67 million and $4.49, widening 603% and 835.4%, respectively, year-over-year.
The company's revenue for the fiscal 2023 third quarter (ending November 2023) is expected to decline 13% from the same period in 2021. Also, analysts expect BBBY’s loss per share for the same quarter to worsen 351.9% year-over-year to $1.13. The company has failed to beat the consensus revenue estimates in three of the trailing four quarters.
BBBY’s shares have plunged 49.9% over the past six months and 46.2% year-to-date to close the last trading session at $8.16.
BBBY’s POWR Ratings are consistent with this bleak outlook. The stock's overall D rating translates to a Sell in our proprietary rating system.
BBBY has an F grade for Stability and Sentiment. The stock has a D grade for Growth and Momentum. Within the Home Improvement & Goods industry, it is ranked #59 of 62 stocks. To see additional POWR Ratings (Value) for BBBY, click here.
CVNA shares were trading at $46.55 per share on Monday morning, down $0.43 (-0.92%). Year-to-date, CVNA has declined -79.92%, versus a -12.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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