What happened
Go ahead and call it the "retail apocalypse." After back-to-back miserable earnings reports from first Walmart on Tuesday and now Target on Wednesday, shares of other retail stocks all across America are plunging this morning.
It seems everyone from teen and young adults clothier American Eagle Outfitters (AEO 0.18%) to GameStop (GME 1.07%) and Best Buy (BBY 0.20%) -- two stocks that cater to the videogamer set -- are in a tailspin today. As of 11:20 a.m. ET, American Eagle stock is losing 6.2%, GameStop's down 7.2%, and Best Buy is leading the retail sector lower with a 10% loss.
Image source: Getty Images.
So what
The retail apocalypse didn't come like the proverbial thief in the night, though. There were warnings. On Monday, investment bank J.P. Morgan cut its price target on American Eagle by 31% a share on worries over earnings, and banker Wedbush sliced $30 off its price target on Best Buy, reports The Fly.
Wedbush cited weakening foot traffic in Best Buy, compared with a year ago when shoppers were still somewhat flush with stimulus cash. Other concerns it pointed to are rising inflation rates, which make goods more expensive, and higher interest rates, which make it even more expensive to buy those goods on credit. (Best Buy reports its earnings next week, by the way. Be warned.) Then just yesterday, analysts at B. Riley also lowered their price targets on American Eagle, citing "decade-high inflation" and higher transportation costs to boot.
It didn't take long for all these worries to be confirmed, with both Walmart and Target missing earnings and reporting negative cash flow -- for the first time in years -- in consecutive reports.
Now what
Now investors are well and truly spooked. But should they be?
That really depends on the individual retailer we're talking about. In the case of GameStop, for example, we're talking about an unprofitable retailer -- that hasn't earned a penny in four years, in fact -- and trades primarily on meme stock hype. It won't report again until June and so probably won't have an opportunity to deliver any bad news until then, either. Regardless, given that no one on Wall Street seems to think GameStop will ever be profitable again (forecast losses on S&P Global Market Intelligence go out as far as anyone is making forecasts), I wouldn't touch GameStop with the proverbial 10-foot pole.
Best Buy is a different matter entirely. Even though analysts are predicting a steep decline in quarterly earnings to $1.64 next week, the stock looks cheap at less than nine times earnings. In fact, Best Buy could miss earnings next week and still be valued at just eight or nine times earnings at its current share price. With a 4.2% dividend yield to cushion your losses, that seems like a steal of a deal to me.
Similarly with American Eagle. With earnings due out May 26 -- just two days after Best Buy reports -- Wall Street analysts are looking for a big drop in profit to just $0.26 per share. If they're right, American Eagle is selling for 7.6 times post-earnings report profits. If they're wrong, maybe eight or nine times earnings at most.
If you ask me, that makes today's prices on Best Buy, and American Eagle, too, look less like a retail apocalypse and more like a great opportunity to scoop up cheap stocks.
