With inflation remaining well above the Fed’s long-term target of 2% and the jobs market remaining tight, Fed Chairman Jerome Powell warned that interest rates would likely rise even higher than previously anticipated.
The stock market will likely remain volatile, with the economy expected to face a recession. Amid this background, I think it could be best to avoid fundamentally weak retail stocks Five Below, Inc. (FIVE), GameStop Corp. (GME), Wayfair Inc. (W), Ollie’s Bargain Outlet Holdings, Inc. (OLLI), and Rent the Runway, Inc. (RENT).
The Consumer Price Index (CPI) revealed headline inflation rose 0.4% over last month and 6% over the prior year in February, in line with expectations. Moreover, the jobs market remains tight as nonfarm payrolls rose by 311,000 last month, higher than the estimated 225,000. This will likely keep the Federal Reserve on track for further interest rate hikes.
According to a survey published by Statista, Americans cited inflation and the high cost of living as the second most important problem facing the United States. Higher consumer prices are forcing people to cut back on retail spending.
Despite high-profile bank failures that have rattled the financial system, markets still expect the Fed to keep up its inflation-fighting efforts. According to TS Lombard Chief U.S. Economist Steven Blitz, the Federal Reserve cannot disrupt its cycle of interest rate increases until the nation enters a recession.
Amid this backdrop, it is advisable for investors to steer clear of FIVE, GME, W, OLLI, and RENT.
Five Below, Inc. (FIVE)
FIVE operates as a specialty value retailer. It offers accessories, athletic tops and bottoms, t-shirts, nail polishes, lip glosses, fragrances, and branded cosmetics and items used to complete and personalize living space, as well as provides storage options for the customer’s room.
In terms of the trailing-12-month asset turnover ratio, FIVE’s 0.99x is 3.6% lower than the 1.02x industry average. Its trailing-12-month levered FCF margin is negative 2.76% compared to the 1.52% industry average.
FIVE’s operating income for the third quarter ended October 29, 2022, declined 50.7% year-over-year to $20.93 million. The company’s net income declined 33.2% year-over-year to $16.15 million. Its EPS came in at $0.29, representing a 32.6% decline from the prior-year quarter.
Analysts expect FIVE’s EPS for fiscal 2023 to decline 5.3% year-over-year to $4.69. Over the past month, the stock has fallen 5.4% to close the last trading session at $195.78.
FIVE’s bleak outlook is reflected in its POWR Ratings. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Specialty Retailers industry, it is ranked #38 out of 44 stocks. It has a D grade for Value and Stability.
To see the additional ratings of FIVE for Growth, Momentum, Sentiment, and Quality, click here.
GameStop Corp. (GME)
GME, a specialty retailer, provides games and entertainment products through its e-commerce properties and various stores worldwide. The company sells new and pre-owned gaming platforms; accessories; new and pre-owned gaming software; and in-game digital currency, digital downloadable content, and full-game downloads.
In terms of the trailing-12-month gross profit margin, GME’s 21% is 40% lower than the 35% industry average. Its trailing-12-month net income margin is negative at 8.54% compared to the 4.58% industry average.
For the fiscal third quarter that ended October 29, 2022, GME’s adjusted operating loss narrowed 7.7% year-over-year to $95 million. Its adjusted net loss narrowed 11.4% year-over-year to $93.40 million. Its adjusted EBITDA narrowed 16.5% over the prior-year quarter to $66.60 million. In addition, its adjusted loss per share narrowed by 11.4% year-over-year to $0.31.
GME’s EPS for the quarter ended January 31, 2023, is expected to remain negative, and its revenue for the same quarter is expected to decline 3.3% year-over-year to $2.18 billion. Over the past nine months, the stock has declined 43.3% to close the last trading session at $16.75.
GME’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.
It is ranked #43 in the same industry. It has an F grade for Value and a D for Stability and Sentiment.
Click here to see GME’s ratings for Growth, Momentum, and Quality.
Wayfair Inc. (W)
W engages in the e-commerce business in the United States and internationally. The company provides approximately forty million products for the home sector under various brands.
In terms of the trailing-12-month gross profit margin, W’s 27.96% is 20.1% lower than the 35% industry average. Likewise, its 1.52% trailing-12-month Capex/Sales is 52.8% lower than the industry average of 3.23%.
For the fiscal fourth quarter that ended December 31, 2022, W’s net revenue declined 4.6% year-over-year to $3.10 billion. Its net loss widened 73.8% year-over-year to $351 million. Its loss from operations widened 68.4% year-over-year to $330 million.
Additionally, its adjusted EBITDA loss widened significantly year-over-year to $71 million, while its adjusted loss per share widened 85.9% year-over-year to $1.71.
W’s EPS for the quarter ending March 31, 2023, is expected to remain negative, while its revenue is expected to decline 8.4% year-over-year to $2.74. It failed to surpass consensus EPS estimates in three of the trailing four quarters. The stock has declined 38.1% over the past month to close the last trading session at $32.53.
W’s POWR Ratings are consistent with its poor prospects. It has an overall rating of D, translating to a Sell in our proprietary rating system. It is ranked #41 in the Specialty Retailers industry. It has an F grade for Sentiment and a D for Momentum and Stability.
Get additional ratings of W for Growth, Value, and Quality here.
Ollie’s Bargain Outlet Holdings, Inc. (OLLI)
OLLI operates as a retailer of brand-name merchandise in the United States. The company offers housewares, bed and bath, food, floor coverings, health, and beauty aids, books and stationery, toys, and electronics, and other products.
In terms of the trailing-12-month Return on Common Equity, OLLI’s 7.32% is 35% lower than the 11.26% industry average. Likewise, its 2.49% trailing-12-month Capex/Sales is 22.8% lower than the industry average of 3.23%.
OLLI’s adjusted operating income for the fiscal third quarter ended October 29, 2022, declined 1.2% year-over-year to $29.53 million. Its net income declined marginally year-over-year to $23.08 million.
Street expects OLLI’s EPS for fiscal 2023 to decline 32.9% year-over-year to $1.58. It failed to surpass the consensus EPS estimates in three of the trailing four quarters. Over the past month, the stock has fallen 6.6% over the past month to close the last trading session at $52.82.
The stock has an overall D rating, equating to a Sell in our proprietary rating system. It is ranked #37 in the same industry. In addition, the stock has a D grade for Value and Stability.
We also have graded OLLI for Growth, Momentum, Sentiment, and Quality. Click here to access all of OLLI’s ratings.
Rent the Runway, Inc. (RENT)
RENT rents designer wear for women through its stores and online retail. The company offers ready-to-wear, workwear, denim, casual, maternity, outerwear, blouses, among other clothing garments and accessories.
In terms of the trailing-12-month asset turnover ratio, RENT’s 0.67x is 34% lower than the 1.02x industry average. Its trailing-12-month net income margin is negative 53.24% compared to the 4.58% industry average.
RENT’s operating loss for the third quarter ended October 31, 2022, narrowed 38.9% year-over-year to $27 million. Its net loss narrowed 58.9% year-over-year to $36.10 million. Moreover, its net loss per share attributable to common stockholders narrowed 91.7% year-over-year to $0.56.
RENT’s EPS for the quarter ended January 31, 2023, is expected to remain negative. Over the past year, the stock has declined 43.1% to close the last trading session at $2.94.
RENT’s POWR Ratings reflect this grim outlook. It has an overall rating of F, translating to a Strong Sell. It is ranked last in the Specialty Retailers industry.
In addition, it has an F grade for Quality and a D for Value and Stability. To see RENT’s rating for Growth, Momentum, and Sentiment, click here.
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FIVE shares were trading at $197.93 per share on Tuesday morning, up $2.15 (+1.10%). Year-to-date, FIVE has gained 11.91%, versus a 2.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...
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