What happened
Shares of retailers Macy's (M -2.03%), Ulta Beauty (ULTA -0.62%), and Overstock.com (BYON -5.06%) fell hard this week, down 18.4%, 15.5%, and 16.5% on the week, respectively, as of 1:38 p.m. ET today.
None of these three stocks reported significant company-specific news this week, but bad earnings reports and outlooks from big-box retail bellwethers Walmart and Target decimated any and all retail names, these three included.
However, each of these companies is a bit more specialized than the two large general consumer retailers. So can they buck the retail winter?
So what
This week, Walmart and Target both reported so-so revenue growth, but plummeting operating margins spooked investors. The margin compression came from two large factors; first, freight, logistics, and fuel costs are skyrocketing due to global supply chain issues. Second, amid higher costs, consumers are trading down to lower-margin staples products, and not buying as many higher-margin discretionary items like home décor or large appliances.
If the largest and strongest retailers can't escape these trends, that doesn't bode well for these three smaller specialty retailers. Overstock is an online furniture and home décor retailer and saw a pandemic-era boom turn into a slowdown as the economy reopens and housing market cools. Overstock reported disappointing earnings back in April, with its CEO explaining, "we could not have anticipated ... the magnitude of the impact of inflation coupled with an adverse geopolitical environment, which ultimately impacted consumer sentiment." Those already present inflation concerns seem to have worsened with Walmart and Target reporting earnings this week.
Meanwhile, Macy's reports next week. While clothing and apparel could see some incremental demand as people venture out more amid the economic reopening, stretched consumer wallets could also limit apparel purchases.
Ulta may perhaps be the best positioned of the three, as it seems unlikely consumers will limit their cosmetics purchases if they are going out and socializing more. Yet, again, with wallets pinched, perhaps consumers may trade down from higher-margin to lower-margin goods.
This week, Ulta made a clever move, unveiling its UB Media network. The media network is an advertising platform for makeup brands looking to reach Ulta's 37 million Ultamate Rewards members. As with Amazon's booming ad sales, Ulta may be able to reap some nice incremental ad revenue from cosmetic brand partners that want to market to customers so close to the point of purchase.
Still, with the stock at 19 times earnings, rising costs and an economic slowdown could cause it to fall further.
Image source: Getty Images.
Now what
These three stocks have been absolutely crushed, with Macy's and Overstock down more than 70% from their all-time highs, and Ulta down more than 20%.
Still, so much depends on the macro environment and the path of inflation. If inflation dies down this summer, these stocks could be bargains. But if it doesn't, consumers will feel the pinch, and the Federal Reserve will have to tighten further, perhaps pushing the economy into recession. As is the case with so many consumer-facing companies, the near term looks very murky, even after these big declines.
