5 Hollywood Wars TeaserMore Articles June 27, 2014 Source: For retailers, Thinkstock 2014 was not a good year. For the year, the SPDR Retailer ETF (NYSEARCA: XRT) declined and the S P 500 was underperformed by about 7 per cent. What’s more, we saw the bottom of many retail stocks drop from Dick’s Sporting Goods (NYSE:DKS) to Whole Foods (NASDAQ:WFM) to almost everyone’s favorite: Amazon (NASDAQ:AMZN). It’s not helping to see low figures of consumer spending that were flat in April and rising just 0.2 per cent in May. Now we have to add another casualty to the list: Bed Bath Beyond (NASDAQ: BBBY). Bed Bath Beyond is a great example of why retail inventories are usually hard to play. The company missed one penny per share on earnings expectations and it missed about 1 per cent on sales expectations. It that its outlook to $1.08 per share for the next quarter to $1.16 per share which is t that short of analyst expectations of $1.20 per share. Still on Thursday the stock tanked 8 percent and the year is down 30 percent. It depends whether this is the best way to analyze these firms. What matters is that they are priced in this way and it follows that minor decreases in forward-looking earnings estimates such as with Bed Bath Beyond lead to dramatic cuts in earnings expectations and subsequent stock revaluation. Because of this, I think Bed Bath Beyond is literally a risky stock to own if you don’t have any real insight that strongly indicates that the company’s decelerating sales growth would reverse. Nonetheless, we’ve seen a flood of weak economic and retail figures pointing in exactly the opposite direction. While the view of the Fed and economists is that the 2.9 percent decline in GDP in the first quarter was an aberration, there is no proof that this is the case especially because we continued to see weak figures for retail sales and consumer spending in the second quarter as described above. This doesn’t mean consumers can avoid purchasing stuff but they are more likely to save and spend less on non-essential products and this doesn’t bode well for a business like Bed Bath Beyond which sells non-essential home furniture that can be bought cheaply from a discount store like Wal-Mart (NYSE:WMT). With the risk of falling sales to non-staple retailers Bed Bath Beyond s enticing multiple 11 price-to-earnings should be avoided. In fact, the entire retail space should be avoided for the time being as these businesses are heavily leveraged to even small changes in consumer spending and there have been far too many instances of retail stocks losing a large amount of value on bad news that could easily have been a statistical anomaly. Disclosure: Ben Kramer-Miller has no role in any of the companies mentioned in this article or in Bed Bath Beyond.
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