I've been waxing on not-so-eloquently about the damage that challenged deeper-value names (or value traps, depending on your perspective) have been experiencing in this market environment. They are typically the first to be sold when there is fear among investors and markets sell off.
On Tuesday we saw the corollary as markets had a decent day and the S&P 500 (up 2.14%), Russell 2000 (up 2.63%) and Russell Microcap (up 2.08%) indices all gained back some ground amid giddy talk about rate cuts (I, for one, don't see that happening). The downtrodden rallied, many well in excess of the broader markets. Among small specialty retailers, Big 5 Sporting Goods Corp. (BGFV) (up 8.25%), Fossil Group Inc. (FOSL) (up 12.4%) and G-III Apparel Group Ltd. (GIII) (up 4.9%), as well as midcap name L Brands Inc. (LB) (up 5.5%) all enjoyed the ride.
A smorgasbord of other names that have been suffering to varying degrees, including Weight Watchers International Inc. (WW) (up 9.4%), General Electric Co. (GE) (up 4.9%), Kulicke & Soffa Industries Inc. (KLIC) (up 6.2%) and Valhi Inc. (VHI) (up 9.3%), also joined the party. Mattel Inc. (MAT) (up 11.7%) had the dual benefit of rising markets and news that it signed a deal to license Hello Kitty products. Newell Brands Inc. (NWL) (up 5.6%) had a good day, then announced the sale of its playing card business, a long-expected move, after markets closed.
GameStop Corp. (GME) enjoyed the ride and was up nearly 5% on the day until it announced first-quarter earnings after markets closed. While the beleaguered video game retailer beat consensus earnings-per-share estimates by 10 cents (reporting EPS of seven cents versus an expected loss of three cents), revenue of $1.55 billion missed the consensus by $90 million. Sales fell 13.3%, and the company announced that it was eliminating its dividend.
The latter move should not have been a surprise; the 38-cent quarterly dividend implied a yield of more than 19%. In any event, markets took shares down nearly 30% in after-hours trading. GME ended the quarter with $543 million, or about $5.30 per share, in cash, down sharply from the $1.6 billion it had at year-end. The company did pay down $350 million of debt during the quarter, which stood at $469 million at quarter-end, and $436 million as of Tuesday's earnings call. This one may be too ugly, even for me.
Meanwhile, United Natural Foods Inc. (UNFI) (up 5.8%), which has been hammered since acquiring Supervalu, enjoyed the day in advance of the release of third-quarter earnings after the closing bell on Wednesday. Consensus estimates are calling for earnings per share of 52 cents on revenue of $6.22 billion. The problem with UNFI, which trades at just 5x next year's consensus earnings estimates, is that it paid too much for Supervalue and over-levered its balance sheet. Debt was reduced by $740 million last quarter and stood at $3.24 billion.
As for the buzz about the Fed cutting rates due to the effects of trade wars and tariffs, I simply don't buy it.