What happened
Retail stock including Costco (COST -12.45%), Kohl’s (KSS -11.02%)Y five down (FIVE -11.54%) were shocked today after retail giants including walmart Y Goal they missed first-quarter earnings estimates and earnings reports. Both companies also lowered their guidance for the year, warning that challenges from inflation and supply chain disruptions would remain.
Although there was no company-specific news on Costco, Kohl’s and Five Below, all three companies will report earnings in the next two weeks, and investors appear to fear experiencing similar headwinds.
As of 11:05 a.m. ET, Costco shares were down 11.4%, while Kohl’s was down 10% and Five Below was down 9.1%. Meanwhile, Target lost 24.4% after its earnings flopped this morning, and Walmart is down 17% in the last two days since it reported earnings yesterday.
Image source: Getty Images.
So what
What appears to be happening in the retail sector is that stocks are being “downgraded” based on economic headwinds such as inflation and supply chain issues. That means valuations, which had arguably been inflated during the pandemic, are falling across the board.
Retailers also face tough comparisons, as the tailwinds of stimulus spending and pandemic hoarding from a year ago have dissipated, and consumer spending is returning to services like travel and dining rather than goods, as Target management said today.
Costco may be the best example of what the market sees as overvalued retail stocks. Although the warehouse chain has outperformed, Costco’s price-earnings ratio has risen to 35, almost double that of S&P 500, even though the company operates in a slow-growing sector. That valuation makes Costco one of the most expensive physical retail stocks. While it deserves to trade at a premium to its peers, it’s reasonable to question whether its valuation has been overly inflated.
The company continues to post strong top-line results, with comparable sales up 8.7% in April, but the bottom line could take a hit when the retailer reports after-hours earnings on May 26. Analysts expect earnings per share to rise from $2.75 to $3.05, according to the report.
Kohl’s is much cheaper than Costco, but it’s also a much weaker business. The company has been seeking strategic direction in recent years, partnering with Amazon to accept returns and sublease excess space to retailers like Aldi. While the company has been solidly profitable, department store chains tend to fare poorly during recessions because they sell mostly discretionary items, and Kohl’s doesn’t control its own inventory the way Costco does with its Kirkland brand.
Kohl’s is set to report first-quarter earnings tomorrow morning, with analysts predicting earnings per share will drop from $1.05 to $0.70.
Finally, Five Below, the mall chain that specializes in items like games and toys for $5 or less, should benefit from the economic reopening as its business model is based on store traffic and the “find the right” experience. treasure” to look through their merchandise. However, with a highly discretionary model and its range of products, the company is likely to feel the impact of cost inflation and supply chain constraints, especially as it has limited ability to raise prices.
Five Below is expected to report first-quarter earnings in the first week of June, with analysts seeing earnings per share down $0.88 to $0.59.
Now what
The good news for retail investors is that current inflationary conditions and economic headwinds are temporary. While the coming quarters could be challenging, the economy will eventually return to a more secure footing.
We’ll learn more about these stocks once they report their next quarterly earnings, but an ongoing sell-off in the sector could be a good opportunity to buy shares of quality companies like Costco.
Reference-www.fool.com