The specialty retail industry has been struggling to survive due to surging inflation and ongoing supply chain disruption. Rising prices have significantly reduced consumer demand. Furthermore, supply chain bottlenecks and increased freight costs have made it difficult for retailers to maintain inventory.
Moreover, with rising recession fears dampening consumer sentiment, specialty retailers are expected to remain under pressure. Investors’ subsiding interest in the retail sector is evident by the VanEck Vectors Retail ETF’s (RTH) 14.9% decline year-to-date.
Specialty retailer stocks GameStop Corp. (GME), Five Below Inc. (FIVE), and Wayfair Inc. (W) are expected to keep losing due to their weak financials and the industry headwinds. So, we think these stocks are best avoided now.
GameStop Corp. (GME)
GME, a specialty retailer, sells games and entertainment products online and in stores in the United States, Canada, Australia, and Europe. It also sells collectibles, primarily licensed merchandise from the gaming, television, and film industries, and pop culture themes. The company operated 4,573 stores and e-commerce sites under the GameStop, EB Games, and Micromania brands as of January 29, 2022.
During the second quarter ended July 30, 2022, GME’s revenue decreased 3.9% year-over-year to $1.13 billion. Its operating loss grew 85.9% from the year-ago value to $107.8 million. The company’s net loss increased 76.5% from the prior-year quarter to $108.7 million. Its loss per share amounted to $0.36.
GME’s EPS is expected to decline 20.2% in the current year and 48.2% per annum over the next five years. The stock has declined 43.5% over the past year and 24.2% year-to-date.
GME's POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, which translates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
GME has been graded an F for Stability and a D for Sentiment and Momentum. Within the C-rated Specialty Retailers industry, it is ranked #44 of 46 stocks.
To see additional POWR Ratings for Growth, Value, and Quality for GME, click here.
Five Below Inc. (FIVE)
FIVE is a specialty value retailer based in the United States. Select brands and licensed merchandise are among the products offered by the company. The company operated approximately 1,190 stores in 40 states as of January 29, 2022.
FIVE’s total revenue increased 3.5% year-over-year to $668.9 million for the second quarter ended July 30, 2022. Its operating income decreased 34.1% from the year-ago value to $56.11 million. The net income declined 36.2% from the prior-year quarter to $41.34 million, while its EPS amounted to $0.74.
Its EPS is expected to decline 10.9% in the current year and 69.8% in the current quarter ending October 2022. The stock has declined 26.8% over the past year and 34.7% year-to-date.
FIVE's weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to Sell in our rating system. The stock has an F grade for Sentiment and a D for Growth and Stability. In the Specialty Retailers industry, FIVE is ranked #40.
In addition to the POWR Rating grades I have just highlighted, you can see the FIVE rating for Momentum, Value, and Quality here.
Wayfair Inc. (W)
W operates an e-commerce business in the United States and worldwide. Under various brands, the company offers approximately thirty-three million products for the home sector. Its websites sell furniture, décor, housewares, and home improvement products under the Wayfair, Joss & Main, AllModern, Birch Lane, and Perigold brands.
W's total revenue decreased 14.9% year-over-year to $3.28 billion for the second quarter ended June 30, 2022. The company reported an operating loss of $372 million, compared to an operating profit of $146 million in the prior-year quarter. Its net loss came in at $378 million, compared to a net income of $131 million in the second quarter of 2021. The loss per share amounted to $3.59.
Street expects W's EPS to decline 165.1% per annum over the next five years. The stock has declined 81.2% over the past year and 73.7% year-to-date.
W’s poor prospects are also apparent in its POWR Ratings. The stock has an overall F rating, which equates to a Strong Sell in our proprietary rating system.
The stock has a D grade for Growth, Quality, and Stability. W is ranked #45 in the same industry. Click here to see the additional POWR Ratings for W (Value, Momentum, and Sentiment).
GME shares fell $0.26 (-0.91%) in after-hours trading Thursday. Year-to-date, GME has declined -22.88%, versus a -17.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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