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Investors Business Daily
Investors Business Daily
Business
HARRISON MILLER

Retailers Raise Red Flags; Analysts Turn Cautious Amid Divergent Results

Certain retail stocks showed clear signs of stress as the start of the important back-to-school shopping season launched to warnings and weak outlooks. Consumer spending, which powered many of the stock market's hottest plays in the first half of the year, signaled areas of cooling heading into the fall.

Macy's and Target cautioned on weakened consumer spending. Others reported impact from theft related to organized crime. Foot Locker, Peloton and Dick's Sporting Goods all crumbled after this week's earnings, dragging footwear and fitness stocks lower. Meanwhile, Dollar Tree and Burlington Stores reported earnings early Thursday.

A broad segment of retail stocks reported weakness in U.S. sales for their June quarters and cautioned of continued softness in the months ahead. Those with international segments saw some support from overseas sales, as international consumers appeared to remain somewhat more resilient.

"I'm seeing softness in consumer spending on durable goods in general. I think the U.S. consumer is finally exhausting the excess savings." Zachary Warring, equity analyst at CFRA Research wrote to Investor's Business Daily. However, Europe and Asia are showing resilience, and aiding U.S. corporations from a "significant slowdown," he added.

Nordstrom and GAP reported after Thursday's close. Lululemon is scheduled to report Aug. 31.

Retail Reports

Dollar Tree earnings fell 43% to 91 cents per share for Q2 results early Thursday, but still managed to beat forecasts of 87 cents. Revenue rose 8.2% to $7.32 billion, compared to estimates of $7.18 billion. Comparable sales for the quarter climbed 6.9%.

Dollar Tree narrowed its fiscal 2023 outlook noting a shifting sales mix, unfavorable shrink trends and higher fuel prices. The company sees full-year earnings between $5.78 to $6.08 per share on $30.6 billion to $30.9 billion in revenue. FactSet analysts expect full-year earnings of $6.03 per share on $30.4 billion in sales. DLTR stock tumbled 12.9% Thursday.

Burlington Stores reported a 71% increase in adjusted earnings to 60 cents per share for Q2 results early Tuesday, coming in well above Wall Street estimates of 44 cents per share. Revenue climbed 9% to $2.17 billion, which matched forecasts. Shares fell nearly 9% Thursday.

For the year, Burlington sees adjusted earnings between $5.37 to $5.67 per share on 11% to 12% sales growth. Analysts polled by FactSet predict full-year earnings of $5.80 per share on 12% revenue growth to $9.73 billion.

Nordstrom earnings rose 3.7% to 84 cents per share adjusted. Net sales fell 8.3% to $3.66 billion. Analysts expected earnings of 45 cents per share on $3.68 billion in sales.

Nordstrom reaffirmed its full-year outlook of adjusted earnings between $1.80 to $2.20 per share. The company sees a 4% to 6% revenue decline. FactSet forecasts earnings of $1.98 per share on a 4.9% slide in sales to $14.77 billion. JWN stock retreated 3.3% early Friday, erasing its late Thursday gains following results.

GAP reported adjusted earnings of 34 cents per share, leaping from 8 cents per share last year. The results edged out forecasts 33 cents. Revenue fell 8% to $3.55 billion, short of the Wall Street sales guidance of $3.77 billion.

"While we are encouraged by our near-term progress, we remain mindful of the mixed economic and consumer environment in which we are operating and continue to plan the business prudently," GAP CFO Katrina O'Connell said in the release.

GAP guided a low double-digit sales decline for Q3. The company expects a mid single-digit decrease in sales for the 2023 fiscal year.

Birmingham. Ala.-based Hibbett earnings tumbled 54% to 85 cents per share Friday, beating estimates of 74 cents per share early Friday. Sales fell 4.6% to $374.9 million, just missing expectations of $376 million. CEO Mike Longo said sales benefitted from a strong start to the back-to-school season. However, Hibbett noticed consumers pulled back on discretionary purchases due to high inflation. HIBB stock popped 8.5% early Friday after results.

Foot Locker Trips Shoe, Fitness Stocks

Foot Locker shares crumbled 28% Wednesday while Peloton stock tumbled about 23%. Nike stock retreated 2.7%, marking its 10th straight decline.

Other footwear stocks On Holding, Deckers Outdoor, Skechers and Crocs faded.

Foot Locker stock dove early Wednesday after revenue fell short of expectations for its Q2 results. The shoe retailer posted a 96% drop in adjusted earnings to 4 cents per share. Revenue fell 9.7% to $1.86 billion. Analysts polled by FactSet expected earnings of 4 cents per share on $1.88 billion in sales.

Foot Locker CEO Mary Dillon noted softening sales trends in July and the company slashed its outlook to "best compete for price-sensitive consumers."

Foot Locker now expects earnings between $1.30 to $1.50 per share on an 8% to 9% sales drop for the year. It previously guided earnings between $2 and $2.25 on a 6.5% to 8% revenue decline.

The shoe seller also paused its dividend to ensure it has flexibility to fund strategic investments.

Foot Locker noted inventory shrink, which refers to merchandise lost due to theft or damage, weighed on profits. Target and Dick's Sporting Goods noted similar concerns in their earnings reports.

Warring raised CFRA's rating on FL stock to hold from sell following the report, but slashed its price target to $5 from $15, noting that shares are now trading in their fair value range. CFRA sees little downside to the company's EPS guidance. But Warring cautioned higher markdowns, theft-related inventory shrink and slowing consumer demand weighed on results.

Peloton Craters On Subscriber Drop

Peloton stock collapsed early Wednesday after missing Q4 expectations and reporting a major drop in subscribers. The exercise bike and workout program provider saw its losses improve to 68 cents per share from a $3.68 per share last year. Sales fell 5.4% to $642 million. The results were well below FactSet expectations of a loss of 29 cents per share on $646.7 million in revenue.

Peloton shed 29,000 subscribers from the prior quarter as executives noted a spending shift toward travel and experiences. However, Peloton subscribership was up 4% on a year-over-year basis. The company reported its seat recall from May 11 was more extensive than expected, leading to $40 million in additional costs for the quarter and related future expenses.

Roth MKM lowered its price target on PTON stock to $9 from $11 following the results but maintained its buy rating on shares. The firm still believes Peloton has a long-term opportunity to take a "considerable share" of the at-home fitness market and expects the stock to remain rangebound until consumer demand normalizes.

Analysts Turn Bearish On Retail Stocks

Loop Capital lowered its price target on Dick's Sporting Goods stock early Wednesday to $115 from $135 and maintained a hold rating on shares. Analyst Anthony Chukumba noted Q2 results were "well short of expectations" as comparable sales, profitability and earnings all missed estimates. The higher inventory shrink was not "terribly surprising," as it affected many other retailers, Chukumba wrote. But, Dick's had to utilize significant markdowns to clear excess inventory for the second time in four quarters, which could point to merchandising or system issues, he added.

Wedbush downgraded Dick's Sporting Goods to neutral from outperform early Wednesday and slashed its price target on DKS stock to $115 from $155.

The firm is a bit more positive about On Holding, which saw a large sell-off following its results last week. Wedbush expects revenue growth in the 30% range for the second half of the year according to an Aug. 15 research note. On posted a "solid beat-and-raise" but the stock is being punished from smaller issues. Wedbush believes the brand and business remain strong while numbers continue to improve. The firm maintained an outperform rating and $36 price target on shares.

Macy's received a host of price target cuts following its earnings results Tuesday. Analysts cited the difficult macroeconomic backdrop impacting traffic and sales trends, while noting that consumer credit card delinquency and default rates increased more rapidly than expected.

Similarly, Telsey Advisory lowered its price target on Target stock last Thursday to $162 from $165 despite the "significant" earnings beat. The firm sees consumer spending on discretionary products softening in the second half of the year with a disappointing outlook on comparable sales. Still, Telsey maintained its outperform rating on TGT stock.

Home Improvement Retail

Home improvement retailers saw some pull-forward revenue during the pandemic as consumers took on projects to upgrade their homes, CFRA Research analyst Ana Garcia told IBD. However, high interest rates are causing a tight home resale market, which translates to lower demand for home improvement projects. Consumers are leaning toward smaller cosmetic projects as they rebalance their budgets to accommodate the resumption of student loan payments, Garcia said.

"In our view, we anticipate retail winners to be those that achieve market share gains," Garcia said. "Currently HD and LOW are undertaking initiatives to expand their market shares which we view positively." Retailers that meet consumers via omnichannel experiences or facilitating transactions also have advantages, which should pay off when economic activity is less restrained, Garcia noted.

You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison

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