MorningWord 6/26/14: Consumer Reports $BBBY

by Dan June 26, 2014 9:25 am • Commentary

Last night Bed Bath and Beyond reported a disappointing fiscal Q1 and offered guidance below analysts expectations, the stock is down about 8% in the pre-market, making new 52 week lows.  In a Name That Trade post on Tuesday, aptly titled Blood Bath & Beyond?,  I concluded that recent history in other once high-flying consumer discretionary stocks like COH, LULU and WFM suggested that BBBY:

looks like a tough press on the short side, recent history shows that trying to pick a bottom in these stories on the long side can also be a tricky business. Therefore defined risk options play are by far the best way to go regardless your inclination, as any bounce may be muted, and a decline could be painful.

For now, that conclusion has been correct, and if the price action of the prior three is any guide, BBBY could see lower lows from these already depressed levels.

I guess more important than figuring out the next five to 10 percent in a single stock like BBBY, would be to draw an intelligent conclusion about what the price action in once-high-growth consumer discretionary stocks is saying about the health of the consumer and thus possibly the future duration of the bull market.  Some market participants with whom I have discussed the issue have suggested that these are one-off situations, and they are company-specific “broken” stories.  I can see that, but the question I have is it the start of a longer term trend rather than a bunch of one offs?

I would say that it is not just mid cap consumer/retail that has imploded:

-TGT (while yes lots of company specific stuff going on there) is down 21% from the all time highs made last year,

-TJX down 17.50% from the all time highs made in January,

-RL down 20% from the all time highs made in 2013,

-PNRA down 22% from all time highs made in March,

-BBY and GME both down 30% from the late 2013 52 week highs,

-COH down 43%, LULU down 47%, and WFM down 41% from the recent all time highs.

TRAIN WRECK, and not really a slow moving one.

I am sure there are more, but doing a scan of charts in the space it is very hard to find stocks within the consumer sector that actually confirmed the new highs in the SPX this past week.  CMG is almost there, YUM did, stocks like SBUX and NKE are making nice attempts, COST and WMT are far from it both down about 8%, the dollar stores were well below prior to Carl Icahn’s involvement in FDO, etc, etc.

There are definitely some decent charts – M, COST (despite a “triangle of death” candidate is forming a nice consolidation), KORS, and DNKN – but none have kept pace with the SPX, which could be the final nail in the coffin for a sector that was a key pillar in the earlier stages of the post financial crisis recovery, and one that helped power the S&P while financial stocks remained under pressure in 2011-2012.

Even with the 6% gain in the S&P 500 in 2014, the consumer discretionary remains in the red, though just barely.  Regardless, the bad news in the sector leads to selling, which leads to under-performance, which has likely led to more rotation out of the sector by portfolio managers looking to beat the index.  From both a fundamental and technical perspective, we expect the under-performance in the consumer sector to continue until at least the calendar turns on 2014, and investors look at the sector with a clean slate.