Margin pressures can hit retailers

An even tighter squeeze may lie ahead for Bed Bath & Beyond.

By Stock Traders Daily Aug 16, 2013 9:11AM

Soap dispenser (© Medioimages/Photodisc/Getty Images)By Neal Rau, Stock Traders Daily

Specialty retailers have been solid performers over the last five years. However, margins have been contracting and many of them are trading near 52-week highs. Let's take a closer look at one name to see if it is a potential buy or potential sell.

Bed Bath & Beyond's (BBBY) revenue and earnings have consistently increased and the stock has done well this year with a year to date return of more than 35%. A steady increase of earnings per share and successful recent acquisitions have fueled the stock increases. However, the company said margins remained soft during the first quarter due to higher operating costs, increases in coupon redemption, higher markdowns, and a shift in the mix of merchandise sold to lower margin categories.

The stock is currently near long-term resistance according to Stock Traders Daily real time trading report, and if resistance holds, the report tells us to expect the stock to fall. The company has been able to perform so well because it offers different price points for its merchandise, depending on the quality of the items. This attracts different types of customers to its stores. If BBBY starts to shift more towards the lower margin categories, it is going to be up against Wal-Mart Stores (WMT) and (AMZN).

Given what we know about BBBY, let's take a look at the low margin players, WMT and AMZN. Wal-Mart might not offer the same top quality of home goods products as Bed Bath & Beyond does, but its low prices attract the low priced point consumers. The biggest threat comes from AMZN, which offers both top quality products and lower priced products. Many people like to come into stores to see products before they buy them, which helps BBBY compete with AMZN. But the problem is that people have their smartphones with them while they are shopping and can dp quick price comparisons on Amazon to see if they can get the same product for less.

Investors have to wonder how long BBBY can survive off coupons and other promotions, which help the company compete with AMZN. If margins continue to slide and NNNY doen't find new ways to compete with AMZN, the stock could suffer.

Stock Traders Daily has BBBY weak near-term, but the stock is in play because it is testing long-term resistance, and if resistance holds the stock could reverse all the way to longer term support. As an investor, you need to ask yourself if it makes sense to buy at long term resistance levels. By rule, our report tells us to target support if resistance holds.



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