Earnings season is in full force on Wall Street, and the impact on stocks thus far has generally been favorable. But today, even an opening round of favorable earnings wasn't enough to sustain gains throughout the day, as most major indexes posted small declines and even the Dow wasn't quite able to set a new record high. Among the worst performers on the day were some of the market's favorite stocks over the longer term, with Lorillard (UNKNOWN:LO.DL), Aaron's (NYSE:AAN), and Michael Kors (NYSE:CPRI) all near the bottom of the list among stocks on Tuesday.
Lorillard declined more than 10% despite the long-awaited culmination of merger talks that resulted in a $27.4 billion bid from tobacco peer Reynolds American (NYSE:RAI). Many investors were disappointed that the price of the merger was relatively low, with some expecting roughly 5% more than the $68.88 per share in cash and stock that Reynolds eventually offered. From a long-term perspective, though, the biggest disappointment was Reynolds American's decision to sell off Lorillard's market-leading e-cigarette product, blu, to Imperial Tobacco in order to focus on Reynolds' own e-cigarette line. With many investors seeing electronic cigarettes and other tobacco alternatives as the key to offsetting falling sales volumes of traditional cigarettes, the merger represents an about-face for Lorillard and could mark a poor strategy for the combined company going forward.
Aaron's dropped 9.5% as the furniture- and electronics-rental retailer warned that its second-quarter sales and earnings would be weaker than it initially thought. The negative impact on sales was minimal, with a half-percent drop to $672 million reflecting poor results from its core retail business. But adjusted earnings per share guidance took a much larger hit, with about a 20% cut to its previous range. Aaron's acquisition of Progressive Finance has helped minimize the impact on its overall results, and a combination of cost-cutting efforts and strategic planning could help Aaron's core business improve its results in future quarters. But going forward, Aaron's will need to see better performance on the rental side of its business in order to drive the growth that investors want to see.
Michael Kors fell 7%, adding to its 3.5% drop yesterday as multiple stock analysts downgraded shares and expressed concerns of the luxury retailer's stock. Most of the bearish comments about Kors stock focus on high valuations and the potential for the retailer to fall out of favor with trend-following shoppers. At least for now, though, Kors hasn't shown any real signs of that happening, despite some surveys suggesting a lack of innovative products in Kors' recent lines. As long as the luxury retailer keeps outpacing its peers at earnings time, Michael Kors has the capacity to keep growing and see its share price soar.