Friday was a pretty bad day for shareholders who had stakes in one or more of the following retailers: J.C. Penney Company (NYSE:JCP), American Eagle Outfitters (NYSE:AEO), Barnes & Noble (NYSE:BKS), Five Below (NASDAQ:FIVE), and Big Lots (NYSE:BIG). While the S&P 500 rallied 1.12%, these companies averaged a 9.56% drop in their share prices. Talk about a bad day, eh?
J.C. Penney's woes
On Thursday, J.C. Penney released its quarterly report for its most recent quarter. However, it wasn't the company's earnings that shook investor confidence. Rather, it was one particular paragraph on page 39 of the company's report that sent shares sliding 8.7%. In it, J.C. Penney disclosed that it is being investigated by the SEC in regard to the state of its finances and the circumstances revolving around the company's secondary offering of shares. This share offering raised controversy after an earlier statement by CEO Ullman that the retailer had adequate cash for the year.
In addition to this bad news, the company's share price was likely pushed down as a result of Kyle Bass's hedge fund Hayman Capital exiting its stake, which was once 5.2%, entirely. Though Bass said on Bloomberg TV that he felt management was working toward improving sales, he said that he wasn't investing in the shares as a turnaround.
Barnes & Noble follows suit
Do you like reading mysteries? If so, you may want to pick up a copy of Barnes & Noble's latest quarterly report. On page 27 of the report you will find that the SEC is now investigating the company, news that sent the stock down 11.96%. The purpose of this investigation is two-fold with each aspect of it supposedly being unrelated to the other.
The first point of interest the SEC is examining involves the company's restatement of earnings that lowered its cost of sales and improved its accounts receivable for 2011 and 2012. As a result of the restatement, the company saw its earnings per share rise by $0.09 in 2011 and $0.07 in 2012.
The second matter the SEC is interested in involves a claim made by a "former non-executive" employee. According to the employee, Barnes & Noble has been shifting certain technology-related expenses from its NOOK segment into its retail segment which makes its NOOK operations appear more attractive to potential buyers. If true, this could constitute a significant fraud, and would almost certainly stymie the company's efforts to unload the failing segment.
American Eagle sinks
Moving away from investigations, let's talk earnings. On Friday, shares of American Eagle fell 9.45% on news that the company fell short of analyst expectations for its third quarter. According to the release, the company saw revenue decline less than expected from $910.4 million to $857.3 million. The fall in revenue was primarily chalked up to a 5% drop in comparable-store sales as the company has had a challenging time appealing to consumer tastes.
Though revenue beat analyst expectations, American Eagle's earnings per share fell far short of what Mr. Market had hoped to see. For the quarter, earnings per share came in at $0.13, significantly lower than the $0.39 the company reported for the same period a year ago and 31.6% lower than the $0.19 that investors expected. Looking at the driver behind the company's deterioration, I arrived at the conclusion that while lower revenue played a role in the margin contraction, so too did an increase in the company's costs as a percentage of sales.
Big Lots took a beating... in more ways than one
Like American Eagle, Big Lots also failed to impress with its Friday earnings release. For the quarter, the company saw revenue rise by 1.6% even as comparable-store sales fell 2.5%. Even worse than the poor comps, though, was the company's earnings. Last year, Big Lots reported a loss per share of $0.10. This year, analysts expected Big Lots to improve a little by posting a loss of only $0.08. However, due to increased costs the company reported a loss per share of $0.17, more than twice what Mr. Market had hoped for.
To make matters worse, Big Lots' management announced that it will cease operations in Canada and it will instead focus on improving and growing its domestic operations. While this may end up being a good idea in the long run, investors are concerned that this will pave the way for larger players like Target to gain traction and greater market power. All of this news helped send shares down 12.55%.
Five Below was beat down on attractive results
Just like the other retailers profiled above that reported earnings and failed to impress, Five Below also took a beating. During the quarter, analysts expected the specialty retailer to report earnings per share of $0.05, up from the $0.01 the company reported last year. Unfortunately, the company fell short of that estimate when it announced EPS of $0.03 which pushed shares down 5.15% for the day.
What's most surprising about this one though is that its results were really impressive. Compared to last year, the company chalked up revenue growth of 27.9%. This was, in part, due to a 9% increase in comparable-store sales. However, most of the gain came from a 24.6% increase in the number of stores in operation after the company increased its store count by 60 locations.
As we can see, each of these retailers took a big beating on Friday. Either they are being investigated by the federal government, or they reported earnings that fell short of analyst expectations. As time progresses, we will get to see what becomes of each of these players. The circumstances surrounding Barnes & Noble concern me the most, while the market's reaction to Five Below's earnings shortfall just looks silly when placed next to its amazing growth.
Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.