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Why GameStop, Foot Locker, and Michaels Companies Dropped Wednesday

By Daniel Miller - May 13, 2020 at 6:01PM

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Comments from Federal Reserve Chair, Jerome Powell, shook the markets significantly Wednesday.

What happened

GameStop (GME -2.33%), Foot Locker (FL -5.11%), and The Michaels Companies (MIK) plunged today with only Foot Locker avoiding a 10% intraday drop, after comments from Federal Reserve Chair Jerome Powell shook the markets.

So what

Retailers, among other hard-hit industries during the COVID-19 economic slowdown, were hoping for a swift rebound in consumer activity as some states slowly reopen parts of the economy. But Powell's comments today made a V-shaped rebound seem unlikely: "The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems," Powell said during his webcast appearance with the Peterson Institute for International Economics. Powell went as far to say that, were COVID-19 impacts to last longer than expected, it could "leave behind lasting damage" to the economy -- essentially the opposite of what most retailers wanted to hear. The gloomy comments, even if realistic, sent markets lower on Wednesday.

^SPX Chart

^SPX data by YCharts

GameStop has been a rare retail stock to outperform the S&P 500 over the past three months, partly due to management's quick reaction to implement a curbside pick-up process at most of its U.S. stores, and taking advantage of its omni-channel and e-commerce capabilities. There's also been an uptick in gaming as more people are stuck at home looking for entertainment. In fact, GameStop noted it retained over 90% of its planned sales volumes in the two-thirds of its stores that are operating curbside operations.

Someone holding a video game controller with a TV screen in the background.

Image source: Getty Images.

The Michaels Companies also adjusted its business to help weather the COVID-19 storm. Michaels and UPS now offer consumers a safe option to pick up and drop off packages outside of certain stores. It's a solution that helps consumers meet social distancing requirements and gives the company some ability to offset lower in-store foot traffic. Michaels announced its fourth-quarter results on March 17, 2020 before much of the COVID-19 negative impact hit retailers. As such, the company's upcoming first-quarter earnings call on June 4, 2020 will have much needed information about how the company's business is faring during COVID-19.

Now what

Brick and mortar athletic and apparel retailers will get some idea about how much financial pressure COVID-19 has applied when Foot Locker reports its first-quarter late next week. The company has been quiet on updates since closing its stores on March 17, 2020, but investors can expect management to comment on the financial health of its business, how its e-commerce capabilities helped offset lost in-store sales, whether the company has ample liquidity to survive the COVID-19 downturn, and how it plans to bounce back safely once stores reopen. That's the position many retailers find themselves in currently, and it's important for investors tempted to buy shares of potentially oversold companies to thoroughly research the company's balance sheet, liquidity, and long-term growth strategy in case the economic recovery is slower than anticipated.

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$117.43 (-2.33%) $-2.80
Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
FL
$24.53 (-5.11%) $-1.32
The Michaels Companies Stock Quote
The Michaels Companies
MIK

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