These 2 Falling Stocks Are Warning Signs for the Market

Thursday produced a complete about-face in market sentiment, as investors seemed to reverse their thought process about the longer-term impact of rate increases from the Federal Reserve. By the end of the day on Thursday, the Dow Jones Industrial Average (^DJI 0.69%), S&P 500 (^GSPC 1.20%), and Nasdaq Composite (^IXIC 1.59%) had all fallen by more than their gains from the previous day, sinking back toward their worst levels of 2022.

Data source: Yahoo! Finance.

Many high-profile tech stocks took big hits, but investors have come to take for granted that these companies will be the first on the chopping block on bad days for the broader market. However, declines for Wayfair (W 5.52%) and Sprouts Farmers Market (SFM 0.09%) following earnings were a bit more troubling because their businesses focus on consumers.

The declines in these stocks suggest that investors fear a recession will hurt people's ability to buy not just discretionary items, but also higher-priced staples. That could spell new problems for a part of the economy that until now has looked fairly healthy.

Image source: Getty Images.

Wayfair deals with steep declines

Shares of Wayfair were down more than 25% on Thursday. The online seller of furniture and other home accessories reported tough financial results and also announced the transition of its chief financial officer.

Wayfair's first-quarter numbers weren't pretty. Net revenue dropped nearly 14% year over year, clocking in at $2.99 billion. U.S. revenue dropped 10%, and Wayfair's international business fared even worse, posting a 31% drop.

Wayfair's bottom line reversed from a modest year-earlier gain to a substantial loss of $319 million, which worked out to $3.04 per share. Even after adjusting for some one-time factors, adjusted losses of $1.96 per share for the period were disappointing.

Wayfair saw deterioration in several key business metrics. The number of active customers plunged 23% to 25.4 million, as of the end of the quarter. Although net revenue per customer rose 13% to $520, orders per customer were down from 1.98 a year ago to 1.87 in the latest period. Order deliveries were down 29% to 10.4 million, with repeat orders falling 26% to 8.1 million.

Wayfair enjoyed explosive growth during the COVID-19 pandemic, but now, the company seems to be readjusting to more normal conditions. Where the company will end up remains to be seen, but investors aren't happy thus far with the trajectory of the business.

Sprouts wilts

Elsewhere, shares of Sprouts Farmers Market also fell sharply, losing 24%. First-quarter results from the specialty grocer eked out small gains, but the slowdown in growth disappointed many investors.

Sprouts wasn't able to generate too much in the way of expanding sales and profits. Net sales of $1.64 billion were up 4% year over year, buoyed in part by a 1.6% gain in comparable-store sales from the year-ago period.

Sprouts opened five net new stores during the past three months and now boasts a network of 379 stores across 23 states. Earnings came in at $0.79 per share, up from $0.70 per share a year earlier.

Even worse, CEO Chip Molloy warned that customers are cutting back on their purchases as a result of inflationary pressures, and the executive doesn't see those pricing pressures slowing in the near future. Molloy guided investors toward the lower end of the guidance range that Sprouts had provided recently, expecting comps to come in flat for the second quarter and earnings to fall to between $0.49 and $0.53 per share.

Sprouts sells key items for shoppers, but they typically have the option to trade down to more traditional grocers. If that happens, it could spell more bad news for Sprouts in the long run.