What happened
Shares of Signet Jewelers (SIG -1.98%) were off by as much as 10.5% at one point on May 18. Abercrombie & Fitch (ANF -3.38%) was lower by almost 12% at its worst. And RH (RH 0.66%) pulled up the rear of this trio, with a decline of as much as 12.5%. All three were off their worst levels of the day by roughly 3:30 p.m. ET, but were still holding on to steep losses. The big story? Target (TGT 1.44%).
So what
Emotions have been running high on Wall Street lately. All it takes is falling short of expectations for a stock to get slammed. Target, which reported earnings that were well short of consensus, plunged as much as 28% today. Investors read into the company's results, noting that it is something of a bellwether name in the retail sector, and sold off just about anything that has to do with retail, including both retailers and companies that produce things that retailers sell.
Image source: Getty Images.
And yet not every company can be treated the same way. For example, The Container Store also reported earnings, but they were pretty good, and included a solid long-term growth outlook that would take sales from $1.1 billion to $2 billion in roughly five years. Investors cheered that news and sent the stock higher even though most retailers were falling.
That said, there are retailers that could face material headwinds if there's a slowdown in the retail sector or, worse, a full-on recession. For example, Signet Jewelers sells exactly what its name suggests. The sales of fancy baubles are likely to dry up in a downturn. A lot of the company's sales are financed (roughly 41% in fiscal 2022), so not only are consumers likely to hold off on new trinkets, but old debts could make it even more difficult for potential customers to consider new jewelry purchases. Luckily, Signet has offloaded most of the risk on these loans, but their overall impact probably won't leave the company unscathed.
Then there's Abercrombie & Fitch, which sells fashion basics to teens. This is a pretty resilient group of shoppers. However, if mom and dad have trouble making ends meet, old clothes will have to do even for the most fashion-conscious kids. Furniture seller RH benefited when people were stuck at home during the pandemic, setting records in fiscal 2021. But if consumers start pulling back, buying a new couch when the old one still looks fine probably won't be top of mind for most.
Now what
Added to the negatives noted above is the impact of inflation, which has been raising costs for retailers. Abercrombie & Fitch, for example, noted a 700-basis-point margin hit from increased freight costs alone in the fourth quarter of 2021. If sales hit a wall, too, margins could end up being crushed even harder than they are already. Investors are worried for good reason today.
That said, this is the time for some second-order thinking, since retailers aren't a homogeneous group. Some will do better than others, such as The Container Store, which is still planning on growth. But there are some retailers that should be treated with a bit more caution given today's environment, a list that probably includes Signet, Abercrombie, and RH.
