Let’s get this straight: When we talk winners and losers in retail, there really is only one true winner: Amazon.com.
Amazon.com Inc. AMZN, +0.12% accounts for an astonishing 43% of all U.S. e-commerce, and with its will to sacrifice margins for scale has completely changed the rules for brick-and-mortar retailers.
But the retail sector is meaningful even outside the $450 billion behemoth of Amazon. And many investors have money tied up in retail stocks, either directly or indirectly via diversified ETFs.
So if Amazon is clearly the best, who’s doing as good as they can? And who’s doing terrible even among their peers?
After looking under the hood in their latest earnings reports, here’s a rundown of three retailers that are not so bad, three that are pretty darn bad and three that are just plain terrible.
No. 1 not-so-bad retailer: Wayfair
Wayfair Inc. W, -1.83% went public at the end of 2014, and since then has largely bounced around the $35 to $45 range. The company is a unique flavor of e-commerce that focuses on décor and furniture, a corner of the marketplace Amazon doesn’t (yet) dominate.
Short sellers have been sharpening their knives and looking for Amazon to bleed Wayfair dry eventually … but sales growth of 29% beat expectations handily, and strong forward guidance caused a wave of short-covering and sparked a quick gain of over 20% for Wayfair shares last week.
Some bearish traders, such as the team at Citron Research who have panned Wayfair since its early days, are admittedly sticking with their bearish bets. And yes, the company is still unprofitable and its shares are volatile. But in the war of Amazon vs. everybody else, Wayfair showed it isn’t a pushover.
Keep in mind, of course, that Amazon is coming for Wayfair eventually.
No. 2 not-so-bad retailer: RH
RH Inc. RH, -6.24% formerly known as Restoration Hardware, was also a bright spot this earnings season.
Higher revenue guidance and a big-time share repurchase plan set up good performance for the shares immediately after the company’s earnings report.
Sure, markdowns are hurting margins. And, sure, buyback plans are financial engineering and not organic growth. However, when a company valued at less than $2 billion announces a $700 million buyback, it’s worth taking note even if organic earnings per share figures aren’t as impressive at RH these days.
No. 3 not-so-bad retailer: Aaron’s
Rent-to-own furniture and electronics store Aaron’s Inc. AAN, -1.20% isn’t exactly a big name on Wall Street. However, the fact that it popped about 20% in the beginning of May on a strong earnings report should make more investors take notice.
Earnings per share of 80 cents blew away forecasts of 66 cents, and revenue also topped expectations. That means Aaron’s stock is riding a string of six quarters that have met or exceeded profit projections. Leading the charge was its Progressive Leasing division, a group that helps other retailers with financing, which showed double-digit growth.
Yes, same-store sales metrics and customer counts were bad. And, yes, a company like Aaron’s that preys on lower-income consumers with high-interest lending can go sideways in a hurry should the economy roll over. But in the here and now, Aaron’s stock is riding high, thanks to strong performance amid an otherwise weak environment for other retailers.
No. 1 pretty darn bad retailer: Kohl’s
Kohl’s Corp. KSS, -0.31% reported a quarterly sales decline last week, coupled with a disappointing 2.7% drop in same-store sales that was more than twice as bad as some analysts were expecting. This is par for the course in the retailer’s earnings history, which has seen revenue pressures for the better part of four years now.
I’m not prepared to write off Kohl’s completely, since it does have something to offer investors. Sales beat expectations, after all. And with pretty robust operating cash flow in the ballpark of $2 billion annually, it is not an altogether terrible target for a private-equity buyout after recent declines in its share price.
But clearly this retailer is pretty darn bad after these results, and continued pressure on revenue could make things even worse.
No. 2 pretty darn bad retailer: Grainger
An early reporter in the retail parade, W.W. Grainger Inc. GWW, +1.11% stumbled about 20% in late April after a similarly poor showing last quarter. The hardware and maintenance-products retailer missed earnings in a big way because of pricing challenges.
In a nutshell, Grainger has historically offered very high list prices and then sweetened the pot with discounts for its big customers. That used to feel good to some shoppers, but in a world increasingly dominated by online shopping, Grainger decided to use more modest headline pricing to attract new customers.
Unfortunately, that gutted margins and, as everyone knows, once you cut prices, there is no good way to raise them once more. Sure, Grainger may have won a few more customers, but the severe headwinds to sales and profits are a disturbing sign that the move overall simply wasn’t worth it. And the fact that Grainger significantly cut its 2017 forecast shows the pain from that mistake is only beginning.
Grainger is still a “dividend aristocrat,” with a nice yield and long history of raising payouts. But the near-term pressures are severe, and the dividend alone isn’t enough to keep investors from walking.
No. 3 pretty darn bad retailer: Dillard’s
While other department stores were missing the mark by wide margins, Dillard’s Inc. DDS, -1.15% beat earnings expectations when it reported figures last week. But beating estimates doesn’t mean the company had a good quarter.
The regional department store’s sales were still down 6%. The company has been fighting against the wave of store closures that have become a feature of malls in recent years, even going as far as to purchase a defunct Macy’s in Utah.
As a Midwestern brand without nationwide appeal or scale, there’s good reason Dillard’s slumped by double digits after earnings and is down 25% this year. Maybe the fundamentals aren’t as bad as some big-box peers, but they could be that bad soon, particularly if the company’s rejuvenation hinges on moving into already-underperforming retail locations.
No. 1 just plain terrible retailer: J.C. Penney
J.C. Penney Co. JCP, -0.80% has reported one disappointment after another for five years now. So in that respect, Wall Street really shouldn’t be surprised at how the company is struggling.
But this latest earnings report was particularly dismal, with J.C. Penney missing expectations by a wide margin and reporting a quarterly loss that was twice as deep as the prior year. The kicker was another significant slump in store traffic, including a 3.5% drop in same-store sales vs. an estimated decline of only 0.7%.
The pain after earnings puts J.C. Penney’s stock at a loss of more than 40% this year, and only a fool would try to catch this falling knife after results like that.
No. 2 just plain terrible retailer: Macy’s
As with the previous two retailers, there’s not much good you can say about Macy’s Inc. M, +1.18% these days. Revenue has declined for eight consecutive quarters, and the company’s hopes of improved earnings through cost-cutting simply haven’t materialized.
Specifically, Macy’s missed its sales and earnings targets in its most recent quarter. The most disturbing thing wasn’t that revenue dried up thanks to underperforming stores being closed for good, but because same-store sales also fell sharply. The result was a double-digit rout immediately after the report, which has continued into this week.
It’s difficult to see a way out of this for Macy’s, other than more store closures and sales declines until it hits bottom. How far the retailer still has to fall, however, is anyone’s guess.
No. 3 just plain terrible retailer: Fossil
Fossil Group Inc. FOSL, +3.37% enjoyed big success several years ago because of its high-priced and fashion-forward watches. Unfortunately, the company has stagnated, even as innovative wearables like Apple Inc.’s AAPL, +0.86% Apple Watch have captivated consumers. And that’s a terrible one-two combo.
The result is a whole lot of pain for the retailer, which just posted a bigger-than-expected loss in the first quarter and saw shares tailspin more than 20% in a single session after earnings.
Fossil continues to push into wearables, but if the recent struggles of Fitbit Inc. FIT, +1.41% are any indication, it’s no easy thing to tap into smartwatch demand — particularly when the wearables segment is only 7% of sales and the rest of Fossil’s portfolio is struggling.
Hopes for high-margin accessory sales made Fossil a great buy in 2010, but competition in the same space will be Fossil’s biggest source of pain in 2017 and beyond.