What happened
For the second day in a row, retail stocks were getting pounded on fears about the novel coronavirus outbreak. Solid earnings reports from Home Depot (HD -0.31%) and Macy's (M -2.03%) were not enough to counteract the broader market sell-off that began Monday, though both of those stocks were up in morning trading.
The SPDR S&P Retail ETF, which tracks the industry, closed down 3.4%. Among the retail stocks that closed down at least 5% today were Macy's, Nordstrom (JWN -1.35%), Foot Locker (FL -4.11%), Gap (GPS 0.55%), Urban Outfitters (URBN -1.05%), and Bed Bath and Beyond (BBBY). Kohl's (KSS -2.45%) and Under Armour (UA -1.97%) (UAA -2.34%) were down 5% earlier in the session, but closed 4.7% and 4.2% lower, respectively.
Image source: Getty Images.
So what
Over the weekend, news outlets reported that cases of the coronavirus (officially known as COVID-19) had spiked in countries including Italy, South Korea, Iran, and Israel, showing the virus has become a threat outside of China. In Italy, for example, the end of the Venice Carnival was canceled and runway shows at Milan's Fashion Week were empty. Indexes like the S&P 500 opened higher Tuesday morning, showing that investors seemed to have digested the news, but panic set it in again over the course of the trading day and, by the afternoon, the broad-market index was down nearly 3%.
Retail stocks are sensitive to the global macroeconomic environment as consumer spending is tied to the general health of the economy. Additionally, nearly every U.S. retailer, especially the apparel chains listed above, counts on China as a significant component of its supply chain.
Macy's stock was initially higher this morning also as the company beat earnings estimates in its fourth quarter, as earnings per share of $2.12 topped expectations of $1.91. However, retail investors may have been more interested in commentary from management on the coronavirus.
CEO Jeff Gennette said that the company believed there could be a small impact on first-quarter sales from international tourism being down. Macy's has cited weak international tourism in the past and has more exposure to that customer segment than most of its retail peers. The greater concern for the broader industry is its impact on the supply chain. Gennette noted that both Macy's and its vendors import a significant percentage of their goods from China, and said the company expected a slowdown, though it hasn't experienced anything of concern yet. Those comments appear to jibe with remarks from Lumber Liquidators (LL), which also released earnings this morning. Company management said that supply chain woes relating to the coronavirus could impact performance in the second quarter, but wouldn't in the first quarter as goods were already in the pipeline.
Now what
All of the retailers that fell as much as 5% today are struggling to varying degrees. Some like Bed Bath and Beyond and Macy's are in the midst of new turnaround strategies. Others like Gap and Under Armour are clearly floundering. Gap recently backed away from a plan to spin off Old Navy and is still searching for a new CEO, while Under Armour said that sales would decline next year, a serious blow for the onetime growth star.
What all of these stocks have in common is that investors already believe they face significant challenges. Nearly all of them are trading at low valuations, priced cheaply because investors take a dim view of their futures. Complications from the coronavirus only exacerbate those risks, and there's a lot of uncertainty surrounding the pandemic currently. Investors don't know how long the contagion will last or how deadly it will be, and they don't know its impact on fundamental components of the global economy like manufacturing in China.
A number of these stocks will report earnings in the coming weeks, including Nordstrom, Gap, Kohl's, and Foot Locker. That will give them a chance to recover some of their losses over the last two days as well as further insight for investors into the impact of the coronavirus. However, these retailers are likely to continue to suffer disproportionately if the sell-off persists, as investors already believe they're at a competitive disadvantage to many of their peers.
