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The first month of 2023 (and the last month of the retail industry’s Q4 2022) saw America’s largest party supply store file for Chapter 11 bankruptcy, a move that the StarMine credit models had predicted about a year ago. The rise in inflation has caused consumers to hold back on discretionary spending. The latest Refinitiv consumer confidence reading also indicates that consumers are concerned about their purchasing power, job security, and future expectations. All of this is affecting consumers’ willingness to open up their wallets and hurting retail sales.

According to the StarMine Combined Credit Risk (CCR) model, the most comprehensive StarMine credit model, the following retailers may be in danger of default (Exhibit 1).

They all rank at the bottom of the StarMine CCR model score. These scores correspond to implied credit ratings of CCC- or worse, suggesting that these stores are not financially stable. For example, Bed Bath & Beyond has a score of 1 corresponding to a CC-implied credit rating, according to the model. This low score also suggests that the danger of default has become greater at 10.57%. When looking at the 203 retailers in the Refinitiv Retail/Restaurant Index, Bed Bath & Beyond has the highest probability of default.

Exhibit 1: Weakest StarMine CCR Model Scores for Refinitiv Retail/Restaurant Index

Source: Refinitiv Eikon

The probability of default (%) is mapped to a StarMine Implied Rating of “CC”, which can be compared to traditional rating agencies. S&P also has marked Bed Bath & Beyond with a “CC“ rating. However, if we look at the evolution of rating changes over time, we note that the StarMine model started giving this warning a year ago, ahead of S&P.

Exhibit 2: The StarMine CCR Model Score History for Bed Bath & Beyond

Source: Refinitiv Eikon

According to StarMine, Bed Bath & Beyond scores in the bottom decile when it comes to the Relative Valuation, Val-Mo, and Short Interest models. Still, the stock has been heavily shorted. StarMine’s Short Interest model gives the retailer a score of 1 on a 1-100 scale. Moreover, the relatively higher proportion of short sales means that the odds of a short squeeze driving the share price higher are possible; the StarMine Short Squeeze indicator stands at 98.

This unique measure combines analysis of the number of short positions and indicators of volatility. Those stocks with a rating closer to the top level of 100 are most likely to experience such a squeeze from a big upward movement as short sellers scramble to get out of their bearish positions. In Bed Bath & Beyond’s case, Wall Street suggests that takeover speculation might trigger the squeeze.

The StarMine Mergers and Acquisitions Target model (in the pre-release version) is at 100. Having a high short squeeze indicator and a high M&A Target score combined is a strong combination.

Exhibit 3: The StarMine M&A Target Model for Bed Bath & Beyond

Source: Refinitiv Eikon
 

Discounters

Consumers are dealing with higher product prices and are looking for ways to save money. In the retail space, there are several discounters that sell gasoline – and drivers are attracted by the competitive prices. Since the beginning of the quarter, November 2022, analysts polled by Refinitiv have been revising their estimates upwards for these discounters for Q4 2022.

Sam’s Club’s Same Store Sales estimate (SSS), including fuel, went up from 5.5% in November 2022 to 9.7% in January 2023 (exhibit below). The same can be said for Costco Wholesale and BJ’s Wholesale SSS including fuel.

Notice how for the most part, the other discounters that don’t sell fuel have weaker SSS estimates for Q4 2022.

Exhibit 4: Discounters Same Store Sales Estimates Revisions: Q2 2022

Source: Refinitiv I/B/E/S
 

Watch out for Dillard’s

Department stores have been out of favor for some time, even before the pandemic. However, Dillard’s stock has risen 444% over the last five years.

For Q4 2022, the StarMine SmartEstimate data shows investors can expect positive surprises from Dillard’s. The retailer currently has an EPS mean forecast of $11.60 a share (Exhibit 5). However, there’s a five-star rated analyst with a very accurate rating that published a higher estimate than the consensus estimate. The analyst expects Dillard’s to report earnings of $16.45 a share, well above the mean.

In a time when most department stores are very promotional to move inventory – Dillard’s has offered very minimal promotions. Its high-end merchandise is also resonating well with consumers.

Exhibit 5: SmartEstimate for Dillard’s Q4 Jan 2023

Source: Refinitiv Eikon

Other retailers performing well include European luxury names. LVMH, Burberry and Hermes all have positive stock price momentum in their favor. The high-end retailers are in the top quartile for the Price Momentum model. The StarMine Earnings Price Momentum Score for Hermes is 95, indicating that the company has positive stock price momentum in its favor (Exhibit 6).

Exhibit 6: StarMine Price Momentum Scores for Luxury Retailers

Source: Refinitiv Eikon

Moreover, all three are on track to see revenue, earnings, and gross margin stronger than pre-pandemic levels. Burberry said in a statement this week that demand from Chinese consumers has started to rise just in time for the lunar holiday. “We saw a fall in traffic to stores in China during December, although there has been a good recovery in January.” (Source: BRBY Trading Statement Call, Jan. 18, 2023) These luxury names are benefitting from the reopening and Chinese shoppers are now traveling to Hong Kong and Macau to buy the latest high-end luxury goods/trends.

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