U.S. retail sales fell as inflation and recession-wary shoppers curtailed their spending. Softness in consumer spending activity stemming from price pressure, a slowing labor market, and a higher interest rate environment indicates that the economy is losing momentum.
Considering the industrial challenges and bleak market sentiment, we think it could be wise to avoid fundamentally weak stocks SIGNA Sports United N.V. (SSU), Conn’s, Inc. (CONN), and Digital Brands Group, Inc. (DBGI), which are declining in April.
The retail industry is currently facing many challenges, such as rising inflation, shifting consumer behavior, rising labor costs, and supply chain disruptions.
The rise in inflation in the past few months hurt consumer wallets. The Consumer Price Index (CPI) revealed that headline inflation rose 0.1% over the last month and 5% over the prior year in March. Although the 5% jump in inflation marks the slowest annual increase in consumer prices since May 2021, it remains significantly above the Federal Reserve's 2% target.
The Commerce Department stated that U.S. retail sales in March declined 1% sequentially, following an upwardly revised reading of a 0.2% decline in February. March retail sales data marked the second straight month of decline in spending, as American households feel the pinch from rising interest rates and the extended period of high inflation and are reducing expenses to compensate.
Credit and debit card spending per household tracked by Bank of America researchers moderated in March to its slowest pace in more than two years. It was likely the result of smaller returns and expired benefits, coupled with slowing wage growth.
Moreover, with the labor market cooling, retail sales will likely remain weak. Ebbing demand for goods is undercutting production at factories, as evident by the manufacturing production’s decline last month.
A senior economist at Nationwide in Columbus, Ohio, Ben Ayers, said, "While job and income gains remain strong, the cracks in the consumer sector are widening and a negative shift in hiring activity could be the final blow to place the economy in a recession."
The rising interest rates and fear of upcoming recession affected consumers’ spending behavior as they tend to save more when interest rates are high. Given this backdrop, retail companies such as SSU, CONN, and DBGI might be avoided.
Let’s look at the fundamentals of these stocks in detail.
SIGNA Sports United N.V. (SSU)
Headquartered in Berlin, Germany, SSU operates as an online sports retail company that offers products from various brand partners across the bike, tennis/racket sports, outdoor, team sports, and athleisure categories.
During its fiscal year that ended on September 30, 2022, SSU’s adjusted EBITDA loss amounted to €66.50 million ($72.91 million) compared to an adjusted EBITDA of €29.60 million ($32.45 million) in the prior year. The company’s operating and net losses widened significantly from the year-ago values to €580 million ($635.91 million) and €565.70 million ($620.23 million), respectively.
On March 16, Stephan Zoll, CEO of SSU, said, "The unexpected consumer sentiment deterioration and inflationary pressures due to the conflict in Ukraine, continued to significantly impact our operations and margins in the first quarter of fiscal 2023, particularly in the bike business and in international geographies.”
SSU’s gross margin was down by 698bps year-over-year to 29.6% in the first quarter of the fiscal year 2023 (ended December 31, 2022), reflecting increased markdowns required to reach target inventory levels, especially in overstocked categories at the lower end of the bike market.
Street expects SSU’s EPS to decrease by 100.8% year-over-year in the third quarter (ending June 2023) to a loss per share of $0.13 and remain negative for the fiscal year 2023. Its revenue for the same period is expected to decline marginally year-over-year to $330.03 million.
SSU’s trailing-12-month ROCE, ROTC, and ROTA of negative 108.87%, 18.31%, and 43.20% compare to the industry averages of 11.79%, 6.34%, and 3.89%, respectively.
The stock has declined 19.2% so far in April to close the last trading session at $3.44.
SSU’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an F grade for Value and Quality and a D for Momentum. Within the Specialty Retailers industry, it is ranked #42 of 44 stocks. Click here to see the other ratings of SSU for Growth, Stability, and Sentiment.
Conn's, Inc. (CONN)
CONN is a specialty retailer that offers a selection of consumer goods and related services in addition to credit solutions for its core consumers. Its retail product categories include furniture and mattress. The company operates through two segments: Retail and Credit.
CONN’s total revenue declined 16.8% year-over-year to $334.88 million for the fourth quarter that ended January 31, 2023. Its operating loss came in at $33.43 million compared to an operating income of $15.03 million in the prior-year quarter. The company’s adjusted net loss stood at $36.74 million and $1.53 per share versus an adjusted net income of $9.64 million and $0.33 per share in the same quarter last year.
The stock’s trailing-12-month gross profit margin of 25.35% is 28% lower than the industry average of 35.23%. Its trailing-12-month ROCE and ROTA of negative 10.61% and 3.45% compare to the industry averages of 11.79% and 3.89%, respectively.
Analysts expect CONN’s revenue to decrease by 12.1% year-over-year in the first quarter (ended April 30, 2023) to $298.77 million. Its EPS is expected to remain negative for the fiscal year 2023.
The stock has slumped 8.8% so far in April to close the last trading session at $4.97.
CONN’s POWR Ratings reflect this weak outlook. It has an overall rating of D, equating to Sell in our proprietary rating system. It has an F grade for Growth and Sentiment and a D for Momentum and Stability. In the same industry, it is ranked #38 out of 44 stocks.
Beyond what I’ve stated above, we have also given CONN grades for Value and Quality. Get all CONN ratings here.
Digital Brands Group, Inc. (DBGI)
DBGI offers a collection of luxury lifestyle through direct-to-consumer and wholesale distribution under various brands, including Bailey 44, DSTLD, Stateside, Sundry, and Harper & Jones. In addition to denims, men’s suiting, and women’s apparel, the company also offers custom and made-to-measure suiting and sportswear, shirts, jackets, pants, shorts, polos, T-shirts, tops, and bottoms.
During the fourth quarter that ended December 31, 2022, DBGI’s net revenues decreased 15.8% year-over-year to $3.38 million. Its loss from operations and net loss widened 29.4% and 62.7% from the prior-year quarter to $13.26 million and $15.78 million, respectively. Also, its loss per share came in at $20.46 in the same period.
The stock’s trailing-12-month EBITDA and net income margin of negative 114.47% and 272.30% compare to the industry averages of 7.77% and 4.38%, respectively.
DBGI’s shares have declined 16.5% in April to close the last trading session at $1.06.
DBGI’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
It has an F grade for Stability and a D for Value and Quality. Within the same industry, it is ranked last out of 44 stocks. To see the DBGI’s rating for Growth, Momentum, and Sentiment, click here.
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SSU shares were trading at $3.55 per share on Friday afternoon, up $0.11 (+3.20%). Year-to-date, SSU has declined -27.70%, versus a 8.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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