Last week, investors were hit with a number of earnings reports from big retailers such as Best Buy, Home Depot, Lowes, Target and Walmart, to name just a few.
Results were mixed, and the stocks traded more based on what management teams expected, rather than what had happened in the previous quarter.
Furthermore, retail sales in October rose 0.8%, according to the Commerce Department. Economist.
That surpassed estimates of 0.6% growth.
Meanwhile, the September sales figure was revised higher to 1%, up from a previous 0.6% increase.
The report was a good indication that the American consumer is doing well heading into the holiday shopping season, but that doesn't mean that the market can't turn on a dime in the near future. If that happens, investors don't want to be holding a bag full of the wrong stocks.
But despite all the good news and earnings reports early in the week, investors bashed a few retailers on Friday after poor earnings reports and concerns over shoe sales.
Revenue of $821.7 million was below the $830.6 million forecast and way off the $878.6 million posted a year earlier. And the retailer posted earnings of just 2 cents a share, compared with analysts' estimates of 21 cents a share and 48 cents a year earlier.
Abercrombie & Fitch said that challenges would remain in the short term but that the customer, marketing and product experience would improve.
The retailer has closed 15 stores this year and plans to shutter another 35 in the fourth quarter, due to natural lease expiration. That means that Abercrombie & Fitch will have closed 350 stores over the past six years.
Of the retailer's 745 leased locations, 50% of them are up for renewal in the next 18 months.
Abercrombie & Fitch looks like a sinking ship, and investors would be wise to steer clear.
2. Gap (GPS)
The worst-performing S&P 500 stock on Friday was Gap, which fell 16.6%.
Gap reported revenue of $3.8 billion for the quarter, which came in higher than what analysts had expected but was still down 2% decline from a year earlier.
Same-store-sales fell 3% for the quarter, while the company's Gap brand sales slipped 8%, Banana Republic also fell 8%, with some of those declines due to a fire in a company warehouse.
The Old Navy brand posted a 3% gain, despite a 1% loss, also due to the fire.
All this contributed to Gap posting non-generally accepted accounting principle earnings of 60 cents a share, in line with estimates but down from 63 cents a share a year earlier.
The real issue that investors had with the earnings report was guidance. Management reiterated its full-year guidance of earnings between $1.87 and $1.92 a share, which implies earnings for the fourth quarter of just 34 to 40 cents a share, well below analysts' estimates of 50 cents a share.
Higher costs from marketing and rent as well as lower industry traffic are the main causes for the weak guidance heading into the holidays.
Gap isn't a stock that investors should look to buy anytime soon, despite the fact that its share are relatively cheap at 14 times earnings and offer a 3% dividend yield. This is an example of a value trap, and there are better alternatives.
3. Under Armour (UA)
Foot Locker also reported third-quarter earnings on Friday, but shares of Under Armour tanked following comments from Foot Locker Chairman and Chief Executive Richard Johnson.
He said that sales of the latest model from Golden State Warrior superstar Steph Curry's shoe line, which is made by Under Armour, have started off slower than previous models.
Under Armour is in a heated battle with Adidas and Nike in the footwear market and needs the shoe line to perform well in order to continue posting strong growth numbers.
Under Armour's price-earnings ratio is lofty, indicating that continued high growth rates have been priced into the stock. If its footwear unit struggles this basketball season, Friday's more than 4% decline in the stock could be just the beginning of a massive decline.
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