Profit Taking Hits Home for Specialty Retailers

Key Points

• The potential impact of higher rates on big ticket furniture buying took a bite out of a home furnishings group that had been red hot.
• Analysts are anticipating a ninth consecutive period of negative revenue growth when Wayfair reports second quarter results August 3rd.
• Overstock.com climbed 74% in June but the overextended retailer has given back a good chunk of that in July.
• It remains to be seen if Overstock's Bed Bath & Beyond re-branding strategy will be a major boom or a bust. 

Americans returned from the 4th of July holiday to find the U.S. equity markets in a less than celebratory mood. 

Stronger than expected economic data, including Thursday’s sharp jump in private payrolls, sent stocks retreating from their July 3rd highs. Comments from Fed speakers around tightening monetary policy contributed to a three-day slide in the S&P 500 amid renewed worries of further interest rate hikes. The markets have priced in another 25 basis point rate hike for this month’s FOMC meeting and odds of additional hikes later this year may be increasing.

Higher rates for longer could be bad news for consumers due to higher credit card, loan and mortgage rates. They could also be a headwind for businesses that rely on 1) financed purchases and 2) debt financing of their own. This is largely why residential construction, recreational vehicle and clothing retailers suffered some of the biggest late-week downturns.

Profit-taking especially set in for online home furnishing stocks. The potential impact of higher rates on big-ticket furniture buying took a bite out of a group that had been red hot. It was a reminder that when the market corrects, the biggest winners often get hit hardest. Shareholders fear peak gains have occurred and scramble to lock in gains, creating a wave of selling pressure.  

It's too soon to know if the 2023 run is over for internet-based home goods retailers. If the market returns to risk-on mode, an appetite for higher-risk underdogs could push them to new highs. In the meantime, second-quarter earnings reports will dictate if more profit-taking — or more gains — are ahead.

Will Wayfair Break its Revenue Decline Streak? 

Wayfair Inc. NYSE: W ran as much as 132% from its May 2nd low on the backs of a better-than-expected first-quarter earnings report. When the market turned south on Wednesday, the online retailer dipped 10% by week’s end. If Wall Street is right, the downturn has only just begun. 

The average target on Wayfair is around $52, which means another $10 could come off its share price over time. Things could change dramatically one way or the other, though, when the company reports second-quarter results August 3rd. Analysts are anticipating a ninth consecutive period of negative revenue growth, with Wayfair shoppers expected to have pared home decor spending yet again. 

Through early June, quarter-to-date revenue was down “in the negative mid-single-digit percentage range,” but management also noted that order growth turned positive during the quarter. With the Street forecasting 6% lower sales for Q2, the contribution from the last three weeks of June will likely determine if a top-line beat is in store. 

Wayfair investors will also soon learn if the recent 50-day/200-day “life cross” event was premium leather — or fake pleather couch.

Will Overstock.com’s Bed Bath Strategy Work?

Overstock.com, Inc. NASDAQ: OSTK climbed 74% in June, but the overextended retailer has given back a good chunk of that in July. With a potential life cross also developing on the daily chart, the next few weeks will be critical. If the popular technical event comes to fruition, this could put Overstock on the map for more traders and spark a bounce. If the pattern fails to emerge, it could prove that Barcalys’ bearish $19 target is on point.

Much of Overstock’s recent gains came from news of the company’s takeover of Bed Bath & Beyond’s digital assets. The market initially celebrated the news, but it may be sinking in that the strategy while promising, remains unproven. Bank of America poured cold water on the idea on Thursday by issuing a Hold rating on the stock. 

Whether Overstock continues to get thrown out with the bath water could depend on this month’s Q2 report. Similar to Wayfair, the company is in a seven-month revenue decline slump which isn’t expected to end until possibly the fourth quarter. Since the Bed Bath & Beyond acquisition occurred June 29th, a benefit from that won’t show in the Q2 numbers. And with ugly Q2 results already expected, that should put management’s commentary around its Bed Bath & Beyond strategy in the spotlight.

Overstock’s $21.5 million move banks on the inherent value of the Bed Bath & Beyond brand, the added exposure to 20 million active Bed Bath customers and broader access to younger shoppers. The re-branding will start with a Canada launch this month, followed by an August/September U.S. launch. By Labor Day, investors could have early indications about whether the major shift is a major boom or a bust.