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Why Retail Stocks Are All Shook Up on Friday

Motley Fool - Fri Apr 14, 11:57AM CDT

What happened

A mixed report on March retail sales from the Department of Commerce sent retail investors scattering hither and yon Friday. As of 11:35 a.m. ET, shares of used car dealer Carvana (NYSE: CVNA) were down 4.4%, and online pet supplies seller Chewy(NYSE: CHWY) was off by 2.2%. On a brighter note, clothing chain American Eagle Outfitters(NYSE: AEO) had gained 3.1%.

So what

In the absence of other stock-specific news Friday, investors are presumably parsing the Commerce Department report closely for clues as to what these companies may say about their recent performances when their next earnings reports roll around. For most retail companies, there's still a bit of time before that happens. American Eagle, for example, won't report until May 24, and Chewy's results aren't due out until May 30. Carvana's Q1 2023 report should come soonest, on May 4.

For the time being, however, how those quarterly results will pan out remains unclear.

As a Reuters article notes, retail sales declined for a second straight month in March, and what's more, they fell "more than expected" -- down 1%. Curiously, however, the sizes of the declines in specific sectors don't quite align with the stock price moves noted above. For example, U.S. car sales fell 1.6% in March -- worse than the overall 1% decline -- which helps to explain why Carvana's stock price is getting hit a bit harder than average Friday. On the other hand, clothing sales declined even more -- down 1.7% -- yet American Eagle stock was up 3.1%.

Adding to the confusion, online retail sales were up 1.9%, yet Chewy -- which sells pet supplies online -- was among Friday's decliners.

Now what

But could it be that these companies' share price shifts Friday actually do make sense?

Consider: While overall retail sales declined in March, and specific sectors are doing either better or worse than average, when you get down to the level of specific companies, the quality of the business in question really begins to matter more than the overall state of the economy.

In that regard, I suspect that part of the reason why Chewy and Carvana are performing worse than average Friday is that Chewy as a business is barely profitable at present (just $6.1 million earned on $2.7 billion in sales last quarter, and just $2.3 million earned on $2.5 billion in sales the quarter before that), while Carvana is entirely unprofitable, having lost money every year it's been in existence, including a $1.6 billion loss last year.

In contrast, with $125 million in net profit last year, American Eagle is trading at a pretty reasonable valuation of 20.7 times earnings, pays a strong 3% dividend yield, and generally speaking, just seems like a much healthier business to invest in.

Sometimes, the reasons stocks move in the ways they move is just as simple as that. Good stocks go up ... and bad stocks go down.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.

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