22 February 2019

Is the slide in US retail plays telling us something?

Retail counters in the United States, including traditional department store chains like Sears and J.C. Penney Co. Inc. as well as big electronic goods sellers such as The Best Buy Co. Inc., have been experiencing rough weather since the start of 2014. In contrast to a generally positive overall trend on Wall Street, many retailers saw their share prices slide more than 10 percent.

Best Buy, for instance, shed about 30 percent after reporting a marginal one percent decline in same-store sales during the Christmas and New Year holidays. The losses serve as a reminder that investors can take a sudden U-turn in their stock preferences, regardless of how robust a counter performed just a month ago, HKEJ’s investor diary column pointed out Wednesday. 

Many old school retailers have, in fact, performed far worse than Best Buy. Burdened by huge overhead expenses and oversized networks, department store chains have been downsizing in recent months.

J.C. Penney decided to slash 2,000 jobs and close 33 stores across the US following a loss of US$586 million in the second quarter last year. Sears issued a profit warning amid continued weakness in sales. Macy’s Inc, another century-old store, decided to shave 2,500 people off its payroll to trim costs.

From a more macro point of view, the widespread slump in share prices and profitability of retail plays brings back memories of similar phenomena in 2000 and 2007. Retail sectors led the overall stock market into taking a bearish turn during those two periods.

Keeping that in mind, investors should not rule out the possibility of the current chill among retail counters heralding a downslide of the overall stock market this year.

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