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Why Chewy, Newegg, and Sleep Number Surged Today

Motley Fool - Tue Oct 17, 2023

Shares of consumer-related stocks Chewy(NYSE: CHWY), Newegg Commerce(NASDAQ: NEGG), and Sleep Number(NASDAQ: SNBR) were surging in today's trading, up 5.4%, 9.1%, and 8.9%, respectively, as of 3:40 p.m. ET. At one point today, both NewEgg and Sleep Number were up over 10%.

With the Federal Reserve having raised interest rates at its fastest pace ever over the past two years, long-term interest rates climbing to their highest level in 17 years, and "at-home" spending having suffered a hangover following the pandemic, investors have largely abandoned many consumer-related stocks. And this goes doubly for consumer stocks that are discretionary, involve big-ticket items, or were in areas that boomed during the pandemic, such as houses, cars, electronics, furniture, and the like.

Today, several of these obliterated stocks are actually surging, thanks to today's hot retail sales report. But are they worth investing in on the prospects of a turnaround?

The U.S. consumer refuses to roll over

Today, the Census Bureau released retail sales figures for the month of September. The report showed a month-over-month increase of 0.7%. That may not sound like much, but that figure annualizes to 8.7% growth, which would be very robust indeed for an economy many think is on the brink of a slowdown or recession. Moreover, the figure was more than double the 0.3% estimated.

Of course, that may not seem like enough to justify these outsize moves in these stocks. But this is what happens when stocks become severely beaten down or oversold; they can spike on even a hint of a better-than-feared situation.

Even with today's moves higher, Chewy and Newegg have each sold off more than 50% this year, while Sleep Number is down slightly more than 25%.

A person sits on the floor and looks at a tablet with a dog.

Image source: Getty Images.

All three stocks have seen a severe slowdown or decline in their results this year. For Chewy, a pandemic favorite and an e-commerce leader in pet food and supplies, management noted on its August conference call that pet household formation had slowed, and that it was seeing some of its customers "trade down" to lower-priced goods.

Moreover, electronics e-commerce site Newegg also saw a near-19% decrease in revenue for the first half of the year, resulting in even deeper net losses than those seen in 2022.

Meanwhile, mattress retailer Sleep Number plunged after its second-quarter earnings report in July, during which management lowered its second-half and full-year guidance by a material amount. The plunge even attracted an activist investor into the stock in September, which claims that Sleep Number is underperforming its potential.

So, these stocks were perhaps due for a dead cat bounce on any sort of positive news prior to the third-quarter earnings season.

However, investors may want to remain cautious on these names

While today's action was positive, I would caution investors on these three stocks for a number of reasons.

First, ongoing strength in the economy could also mean long-term interest rates will continue to rise. Already, the 10-year Treasury bond yield rose again today to 4.85% as of this writing. That should put a firm ceiling on how high a stock can rise, especially if it's unprofitable or not very profitable today. Newegg is still inking net losses, and Chewy is barely profitable. So, these two stocks may not rise very much even if their revenue trajectories improve if yields stay high.

Moreover, while overall retail sales were still solid, particular categories for Sleep Number and Newegg weren't as good. For Sleep Number, the home furnishings stores category was still down 4.4% year over year and down slightly on a month-over-month basis. For Newegg, electronics purchases were down 2.1% year over year and roughly the same month over month.

Things are still highly uncertain in the economy now, so it may be best for investors to target higher-quality and profitable companies within growth industries, especially after many other high-quality names pulled back in August and September. Turnarounds are much more risky, and difficult to time.

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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool recommends Sleep Number. The Motley Fool has a disclosure policy.

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