Beware of These 2 Downgraded Retail Stocks
Current global supply chain disruptions have been causing companies great distress. For instance, retailers are struggling to keep up with surging consumer demand ahead of the holiday season. And because...
Current global supply chain disruptions have been causing companies great distress. For instance, retailers are struggling to keep up with surging consumer demand ahead of the holiday season. And because supply chain disruptions are not expected to ease anytime soon, we think fundamentally weak retail stocks Wayfair Inc. (W) and Bed Bath and Beyond (BBBY) are best avoided now. Indeed, wall Street Analysts have recently downgraded these stocks because they look overvalued at their current price levels. Read on.
The COVID-19 pandemic-induced limitations caused industry shutdowns worldwide last year. But as constraints eased this year with solid progress on the vaccination front, an unexpected increase in demand has wreaked havoc on manufacturers and distributors, whose production now lags pre-pandemic levels for several reasons, including labor shortages, and supply chain disruptions.
Supply chain bottlenecks and production system blockages have negatively impacted several industries, leading to panic overordering by retailers and manufacturers, exacerbating the supply chain crisis.
Wayfair Inc. (W) and Bed Bath and Beyond (BBBY) are among the retail giants whose shares have tanked on the ongoing supply chain disruptions because investors expect their financials to be impacted in the near term. Analysts have recently downgraded these stocks. Hence, we think these stocks are best avoided now.
Wayfair Inc. (W)
W operates an e-commerce company in the United States and internationally. The Boston, Mass.-based company offers furniture, decor, housewares, and home renovation goods under the Wayfair, Joss & Main, AllModern, Birch Lane, and Perigold brands through its websites. The stock was recently downgraded to ‘Hold’ from ‘Buy’ by Jefferies analyst Jonathan Matuszewski.
For the second quarter, ended June 30, 2021, W’s net revenue declined 10.4% year-over-year to $3.86 billion. Its operating income decreased 51.6% from its year-ago value to $145.21 million. The company’s net income declined 52.4% from the prior-year quarter to $130.43 million, while its EPS came in at $1.14 over this period.
W’s EPS is expected to decline 33.9% in the current year. The stock has fallen 17% in price over the past year and 13% over the past month.
In terms of forward non-GAAP P/E, W is currently trading at 71.37x, which is 392.3% higher than the 14.50x industry average. Also, in terms of its forward EV/Sales, the stock is currently trading at 1.84x, which is 27.5% higher than the 1.44x industry average.
W’s POWR ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
W is rated a D grade for Stability, Value, and Growth. Within the B-rated Specialty Retailers industry, it is ranked #37 of 42 stocks.
To see additional POWR Ratings for Sentiment, Quality, and Momentum for W, click here.
Bed Bath and Beyond (BBBY)
BBBY in Union, N.J., runs a chain of domestic merchandise retail stores. North American Retail and Institutional Sales are the company’s two operational segments. It operated 1,020 shops as of February 27, 2021, including 834 Bed Bath & Beyond stores in 50 states, 132 buybuy BABY stores, and 54 Harmon, Harmon Face Values, or Face Values stores. In addition, the company operates Decorist, an online interior design platform that provides customized home design services. Morgan Stanley recently downgraded the stock to ‘Underweight’ from ‘Equal Weight’.
During the second quarter, ended August 28, 2021, BBBY’s revenue declined 26.2% year-over-year to $1.98 billion. Its operating loss came in at $84.11 million, compared to a $270.54 million operating profit in the prior-year period. The company reported a $73.22 million net loss, compared to a $217.90 million net profit in the second quarter of 2020. Its loss per share amounted to $0.72, compared to a $1.75 EPS in the same period last year.
Analysts expect BBBY’s revenue to decline 11.4% year-over-year to $8.18 billion in the current year. The stock has declined 41.7% in price over the past year and 39.9% over the past month.
In terms of forward non-GAAP P/E, BBBY is currently trading at 16.97x, which is 17.1% higher than the 14.50x industry average. Also, in terms of its forward EV/EBIT, the stock is currently trading at 18.62x, which is 39.9% higher than the 13.31x industry average.
BBBY’s weak fundamentals are reflected in its POWR ratings. The stock has an F grade for Sentiment, and a D for Stability. In the B-rated Home Improvements & Goods industry, it is ranked #40 of 62 stocks.
In addition to the POWR Ratings grades I have just highlighted, one can see the BBBY rating for Growth, Value, Quality, and Momentum here.
W shares were unchanged in premarket trading Wednesday. Year-to-date, W has gained 10.28%, versus a 21.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.