In this article we present the list of 10 Retailers Hedge Funds Are Bailing On As Inflation Soars. Click to skip ahead and see the 5 Retailers Hedge Funds Are Bailing On As Inflation Soars.
Soaring inflation is driving money managers away from retailers like AutoZone, Inc. (NYSE:AZO), Walmart Inc. (NYSE:WMT), and The TJX Companies, Inc. (NYSE:TJX), among others.
To say the current market environment is a challenging one for retailers would be an extreme understatement. In the midst of retailers contending with the lingering effects of the pandemic and its impact on consumer behavior have arisen a host of new obstacles, including supply chain disruptions, and rising labor, material, and transportation costs.
Rising costs and inventory disruptions are putting pressure on retailers to raise prices to compensate, but with consumers already getting tapped out at the pumps and grocery store, it’s becoming harder for them to justify discretionary and other spending.
Walmart Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) learned that the hard way earlier this year as they failed to predict weakening sales and got saddled with excess inventory that then needed to be marked down. Trying to stay ahead of supply chain challenges may have also contributed to the excess inventory levels, which were up 32% year-over-year in Q1 for Walmart and 43% for Target.
After rising by a modest 0.7% in April, retail sales fell by 0.1% in May, which caught many off guard, as the consensus was that retail sales would rise during the month. Given that those figures aren’t adjusted for inflation, real sales in May were off significantly. Retail sales did bounce back in June, rising by 1% month-over-month, though given that inflation rose by 1.3%, real sales were still down.
Even then, not all retailers were benefitting from the rising consumer spending, as general merchandise sales fell by 0.2%, being dragged down by department store sales, which slid by 2.6%
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Consumer stocks have fallen in lockstep with sales momentum this year, as the consumer discretionary retail composite is down by 20.3% year-to-date. Apparel retailers have been among the worst performers on the stock market, losing 22.2% this year, while specialty stores are down by 23% and general merchandise stores by 12.3%.
While the consumer staples sector has performed much better, some of its retail components have struggled mightily as well, with drug retailers down 24% in 2022, household products stocks down 13.6%, and personal products companies down by 26.2%.
In this article, we’ll check out the ten retailers that elite money managers have been bailing on in recent quarters as inflation soars and consumer spending slumps.
Our Methodology
The following 10 retailers lost noteworthy levels of hedge fund support in recent quarters. We follow hedge funds because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns. All hedge fund data is based on the exclusive group of 900+ funds tracked by Insider Monkey that filed 13Fs for the Q1 2022 reporting period.
10. Bed Bath & Beyond Inc. (NASDAQ:BBBY)
Number of Hedge Fund Shareholders: 15
AutoZone, Inc. (NYSE:AZO), Walmart Inc. (NYSE:WMT), and The TJX Companies, Inc. (NYSE:TJX) are some of the biggest retailers that are losing hedge fund support, but few retailers have lost as much recent smart money support as Bed Bath & Beyond Inc. (NASDAQ:BBBY). The company has lost over half its hedge fund shareholders since the end of 2020, sinking to an all-time low level of support in Q1 of this year.
Bed Bath & Beyond Inc. (NASDAQ:BBBY) has taken intense steps to turnaround its flagging business over the past few years, closing over 1/3 of its stores, unloading its non-core businesses, and expanding its ecommerce platform. The initiatives appeared to be having some impact, as Bed Bath & Beyond came blazing out of the pandemic lockdowns by growing comps for four straight quarters.
The transformation appears to be stalled out now however, which is likely why hedge funds are bailing on Bed Bath & Beyond Inc. (NASDAQ:BBBY) in droves. Comps have seen accelerating declines over each of the past four quarters, jumping to a 22% decline in Q1, while the company’s adjusted gross margin has imploded by over 33% in just two quarters, falling to 23.8% in Q1.
9. Chico’s FAS, Inc. (NYSE:CHS)
Number of Hedge Fund Shareholders: 16
There has been a decline in hedge fund ownership of Chico’s FAS, Inc. (NYSE:CHS) over each of the past three quarters, with a 27% drop during that period all told. Bruce Kovner’s Caxton Associates and Lee Ainslie’s Maverick Capital have been just a few of the hedge funds that have sold off their CHS positions since mid-2021.
Chico’s FAS, Inc. (NYSE:CHS)’s own turnaround initiatives appear to be bearing more fruit than Bed Bath & Beyond’s, as the apparel retailer had an impressive first quarter, crushing top and bottom line estimates with $540.9 million in revenue and $0.28 in EPS. Comps soared by 40.6%, led by 65% comps growth for White House Black Market and 52% for Chico’s. Soma also achieved its best ever Q1 sales.
The Miller Value Partners Deep Value Strategy likes Chico’s FAS, Inc. (NYSE:CHS)’s turnaround initiatives and believes the stock has long-term upside, as revealed in the fund’s Q4 2021 investor letter:
“During the quarter, we had two main positive contributors, (which includes) Chico’s FAS, Inc. (CHS), where both holdings were up more than 10%. Chico’s FAS, Inc is a turnaround retail investment that operates three main banners (Chicos, White House Black Market, and Soma). New CEO, Molly Langenstein, has done a wonderful job repositioning the banners and dramatically enhancing each brand’s merchandise, which has been well received in the marketplace. The company has also rolled out new digital tools that are expanding its customer base and driving greater efficiencies in the business. We see significant growth over the coming years as Chicos returns to historical revenue and margins levels, and Soma executes on their growth plans to achieve $1B in revenue. In our opinion, Chico’s share price remains mispriced and has long-term upside potential more than 3x the current price.”
8. The Gap Inc. (NYSE:GPS)
Number of Hedge Fund Shareholders: 23
The Gap Inc. (NYSE:GPS) experienced a significant drop in hedge fund ownership during Q3 2021, followed by another notable drop in Q1 of this year. In total, the clothing retailers has lost just under half of its hedge fund support over the past four quarters. Arrowstreet Capital sold off its massive stake in GPS during Q4, unloading 9.06 million shares.
Like Bed Bath & Beyond, The Gap Inc. (NYSE:GPS) came storming out of the pandemic lockdowns, thanks in part to government stimulus programs that boosted discretionary spending. The company was guiding for 30% year-over-year sales growth around the middle of last year and adjusted EPS of as much as $2.25 before things went sideways due to supply chain hiccups and rising freight costs. The company ended the year with adjusted EPS of just $1.44 and 21% sales growth.
Things went from bad to worse in Q1, as The Gap Inc. (NYSE:GPS)’s sales fell by 13%, being led down by a disastrous inclusive sizing initiative at Old Navy. The brand’s comps cratered by 22% as clothing sizes on the extremes were overrepresented, while stock ran out of the most common sizes. That major misstep was among the reasons the company fired its CEO in July. The new CEO will now attempt to turn around the turnaround, while hedge funds sit on the sidelines.
7. Best Buy Co., Inc. (NYSE:BBY)
Number of Hedge Fund Shareholders: 25
Best Buy Co., Inc. (NYSE:BBY) has lost hedge fund support over five of the past six quarters, with ownership of the stock diving by 38% during that period. Ray Dalio’s Bridgewater Associates and Cathie Wood’s ARK Investment Management both unloaded their BBY stakes during Q1.
Best Buy Co., Inc. (NYSE:BBY) grew sales to $51.8 billion in its fiscal 2022 ended January, an 8.5% year-over-year increase. GAAP EPS growth was even more impressive at 44%, thanks to a growing services business and booming ecommerce sales. Q1 of FY 23 hasn’t been as strong however, as comp sales fell by 8%, being dragged down by weakness in appliances and home theater. Best Buy Co., Inc. (NYSE:BBY) now trades at 8.47x earnings, its cheapest level in the last decade, though it’s trading above its 5-year averages in terms of price to cash flow and price to book.
6. Abercrombie & Fitch Co. (NYSE:ANF)
Number of Hedge Fund Shareholders: 26
There’s been a 19% drop in hedge fund ownership of Abercrombie & Fitch Co. (NYSE:ANF) over the past three quarters, each of which has seen a drop in ownership. Alexander Mitchell’s Scopus Asset Management and Noam Gottesman’s GLG Partners are some of the funds that have sold off their ANF positions in the past three quarters.
Abercrombie & Fitch Co. (NYSE:ANF) released some of the details of its Always Forward Plan, which aims to eventually hit $5 billion in annual revenue. The company plans to achieve that growth through three main initiatives, which include building up three of its most important brands, growing its digital footprint through investments in analytics and other initiatives, and operating with financial discipline.
Abercrombie & Fitch Co. (NYSE:ANF) has aggressive FY 2025 sales and EBIT margin targets of $4.1-$4.3 billion and 8% respectively. There is skepticism about the apparel retailer’s ability to meet those targets however, with Citi analyst Paul Lejuez stating that there is so little visibility into FY 22 and FY 23 to give much if any credit to such bold FY 25 projections. The analyst has a ‘Neutral’ rating and $21 price target on the stock.
AutoZone, Inc. (NYSE:AZO), Walmart Inc. (NYSE:WMT), and The TJX Companies, Inc. (NYSE:TJX) have also been losing hedge fund support in recent quarters. Check out the details in the second part of this article.
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Disclosure: None. 10 Retailers Hedge Funds Are Bailing On As Inflation Soars is originally published at Insider Monkey.