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2 Losing Retail Stocks to Avoid Ahead of Earnings

Published 02/17/2023, 04:49 PM
Updated 11/14/2023, 07:35 AM
  • Retailers are the final group of companies scheduled to report earnings this season
  • Investors should avoid Target and Stitch Fix ahead of their latest results
  • Both companies are set to deliver sharp declines in EPS and sales growth due to the uncertain outlook
  • In sharp contrast to Wednesday’s article, in which I highlighted TJX Companies (NYSE:TJX) and Academy Sports Outdoors (NASDAQ:ASO) as two of the best names to currently own in the retail space, below I take a look at two retailers whose stocks you ought to avoid ahead of their upcoming earnings in the weeks ahead.

    1. Target

    Now is a time to avoid Target (NYSE:TGT) stock as the big-box retailer faces a challenging macroeconomic environment which is seeing Americans cut back spending on discretionary items as their disposable income shrinks.

    Besides the gloomy macro backdrop, the Minneapolis, Minnesota-based company - which is the seventh largest retailer in the U.S. - has also been struggling with higher cost pressures and decreasing operating margins as it cuts prices in an ongoing effort to clear unsold inventory from its shelves.

    Target’s fourth quarter earnings update is due ahead of the opening bell on Tuesday, Feb. 28. Results are likely to reveal another sharp slowdown in profit and sales growth due to the difficult operating climate.

    Unsurprisingly, an InvestingPro survey of analyst earnings revisions points to mounting pessimism ahead of the report, with analysts cutting their EPS estimates 27 times over the last 90 days, compared to zero upward revisions.

    The downbeat outlook follows a shockingly weak earnings result in mid-November that sent shares of the retail heavyweight tumbling.

    Target Stock Earnings Preview

    Source: InvestingPro

    Consensus estimates call for Q4 earnings per share of $1.40, which would be a massive 56.1% drop from EPS of $3.19 in the year-ago period.

    Target has missed Wall Street’s EPS forecasts in each of the last three quarters due to the negative impact of rising operating expenses and higher freight and transportation costs on its business.

    Meanwhile, revenue is forecast to decline 1% year-over-year to $30.7 billion amid several headwinds, including ongoing inventory and supply chain issues, lingering inflationary pressures, higher interest rates, and concerns about a slowing economy.

    Therefore, I believe that CEO Brian Cornell will strike a cautious tone in his guidance for the months ahead as the retailer faces an uncertain economic outlook.

    Target Daily Chart

    TGT stock - which has surged roughly 17% since the start of 2023 - ended at $174.54 on Thursday. At current levels, Target has a market cap of $80.3 billion.

    Despite the strong year-to-date performance, shares of the retail giant have underperformed the broader market by a wide margin over the past 12 months, falling 15.7% compared to the S&P 500’s 8.5% decline over the same timeframe.

    2. Stitch Fix

    With high inventories, little pricing power, and a weak economic outlook, investors should stay away from Stitch Fix (NASDAQ:SFIX) stock, in my opinion.

    The online personal styling service provider - which was one of the big COVID winners of 2020 - faces major challenges to its business model as it struggles from a shift in how the U.S. consumer is spending money.

    I have a hard time seeing Stitch Fix regain its footing in a post-pandemic world and continue to believe there are material risks to its long-term outlook, which could push shares down to fresh lows in the year ahead.

    The beleaguered company announced last month that it planned to reduce salaried headcount by 20%, the second major round of layoffs in the past eight months. In addition, it said it would close its Salt Lake City distribution center as the company slashes costs.

    Stitch Fix also announced a management shakeup, which saw Elizabeth Spaulding step down as Chief Executive Officer after just 18 months in the role. The company’s founder and former CEO, Katrina Lake, was named interim CEO until her successor is appointed.

    Although Stitch Fix has not formally confirmed its next earnings release date, the company is tentatively scheduled to deliver its fiscal second quarter update on Monday, Mar. 13, after the U.S. market closes.

    The online wardrobe-styling platform provider has missed estimates on both the top and bottom lines for three quarters in a row, reflecting the negative impact of several headwinds on its business.

    As could be expected, analysts have slashed their EPS estimates by 95.6% in the 90 days leading up to the earnings report, according to an InvestingPro survey.

    Stitch Fix Earnings Preview

    Source: InvestingPro

    Consensus expectations call for the personal-styling company to report a loss of $0.32 per share, worsening from a net loss of $0.28 in the same quarter last year, mostly due to price cuts and write-downs associated with excess apparel inventory.

    Revenue is forecast to fall 20.1% year-over-year to $412.9 million, reflecting dwindling demand for its personal shopping and styling service amid the tough macro environment that has weighed on demand for clothing.

    Stitch Fix, which shed 11% of its active client base in fiscal Q1, has seen users leave at a blistering pace in recent quarters, underlining worries that it may have been a pure COVID-play that just so happened to go public at its peak.

    Stitch Fix Daily Chart

    SFIX stock, which has rallied sharply to start the new year, is up a whopping 55.9% through the first seven weeks of 2023 as investors rotated back into the beaten-down growth names of yesteryear.

    Notwithstanding the recent turnaround, shares remain down about 65% in the last 12 months and are roughly 96% away from their January 2021 all-time high of $113.76.

    At current levels, the San Francisco-based company has a market cap of $537.4 million, compared to a peak valuation of nearly $10 billion in early 2021.

    Disclosure: At the time of writing, I am short on the S&P 500 and Nasdaq 100 via the ProShares Short S&P 500 ETF (SH) and ProShares Short QQQ ETF (PSQ). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials.

    The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.

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