The retail business is one of the easiest sectors to understand as an investor. It's all about revenue growth and margins. Yet in a world where once-dominant players like J.C. Penney and Sears have become perennial losers, the first sign of trouble can spark panic selling.
That's good news for bargain hunters. Not every retailer that hits a rough patch is headed into a downward spiral to irrelevance, and a careful investor can find some real bargains among specialty retailers.
The Pier 1 panic
Last week saw a prime example of panic selling in Pier 1 Imports (NYSE: PIR ) . The stock dropped from more than $18 a share to slightly more than $15 in less than 48 hours after missing its quarterly earnings estimate by $0.04 per share and lowering its EPS guidance for the full year by $0.02.
A less than 2% drop in the estimated annual earnings led to a roughly 20% drop in stock price. CEO Alexander Smith said he wasn't clear if the difficult quarter was a "sea-change" or just a temporary concern, adding to the panic sell-off.
Even if the "sea-change" is a drag on margins, Pier 1 Imports has a very healthy balance sheet and a forward P/E of just a hair more than 10. It's a growing company, albeit slightly slower growing than it once was, and with a nice, low PEG ratio of 0.8, it's hard to deny that the panic sellers have driven the price too low.
The bed, the bath, and the beyond
Another stock that fell out of favor on an earnings miss was Bed Bath & Beyond (NASDAQ: BBBY ) . It missed third quarter 2014 earnings-per-share estimates by $0.03 in January. Fourth quarter earnings were back in line with estimates, but the pessimism from January kept dragging the stock down, shedding about $20 a share since.
Similar to Pier 1 Imports, Bed Bath & Beyond has a lot to love about its balance sheet. Indeed, it's totally debt-free and is trading at a modest P/E of 12.5, with growing revenue and earnings giving it a forward P/E of about 11.
There's more to like here too, as Bed Bath & Beyond commands a strong 14% operating margin and has a nice 25% return on equity. The Q3 earnings miss looks like an aberration at this point for a very well-run company, yet investors have so far failed to appreciate the value proposition offered by this stock.
Let slip the dogs of retail
Finally we come to PetSmart (NASDAQ: PETM ) , another company that cut guidance in the first quarter and got absolutely annihilated by the market for it. It's a little bit different from the other two stocks here.
First of all, there was no earnings miss. In fact, PetSmart has surprised on the upside for four straight quarters now and is still growing, just at a somewhat slower rate as it gets larger and has fewer big markets to move into.
A forward P/E of 12 and a PEG ratio of 1.1 are the basics of this company, but the real eye-opener is its 39.7% return on equity, which speaks to its ability to invest its equity and invest it well.
The downside is that PetSmart's balance sheet is a bit less favorable, with $519 million worth of debt. That's very manageable for a company with annual sales of around $7 billion, but unlike Pier 1 Imports or Bed Bath & Beyond, it doesn't have the sort of impossibly low debt/equity that enables it to turn on a dime when market conditions change.
Buying by the numbers
Every piece of bad news needs to be weighed carefully, particularly for retail stocks, but not every earnings blip is the kiss of death. Good returns on the market sometimes mean taking the calculated risks other people aren't taking.
When you compare the "bad news" of these three companies to the amount their stocks fell, they simply don't add up. While discretion may sometimes be the better part of valor, any of these three stocks would be worth considering as a rebound candidate after taking such an undeserved beating.
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