Due to multi-decade high inflation, the Fed's aggressive monetary policy stance, and the Ukraine-Russia war, the stock market has been in correction territory of late. The consumer price index climbed 8.3% in April, surpassing the 8.1% estimate. These factors, combined with rising energy prices, negative GDP in the first quarter, and aggravated supply chain disruptions due to extended COVID-19 lockdowns in China, could push the U.S. economy into a recession.
When market sentiments are bearish, discretionary spending is the first thing consumers cut. Since the economy's odds of witnessing a recession have increased, cyclical stocks could be hard hit. Many companies in the consumer discretionary sector suffered significant losses in the first quarter and lowered their year-end projections. The bearish sentiment surrounding the sector is evident in the SPDR Consumer Discretionary Select Sector ETF's (XLY) 17.4% decline over the past month.
So, we think the stocks of fundamentally-weak consumer cyclical companies Lear Corporation (LEA) and 1-800-FLOWERS.COM, Inc. (FLWS), which have cut their full-year guidance, are best avoided now.
Lear Corporation (LEA)
Headquartered in Southfield, Michigan, LEA designs, develops, engineers, manufactures, assembles, and supplies automotive seating and electrical distribution systems and related components for automotive original equipment manufacturers in North America, Europe, Africa, Asia, and South America.
LEA reduced its revenue outlook for its fiscal 2022 to $20.4 - $21.20 billion versus the prior estimate of $20.8 - $22.30 billion. In addition, it expects an adjusted EBITDA of $1.365 - $1.565 billion for the year versus the $1.50 - $1.80 billion previous forecast of.
For the first quarter, ending April 2, 2022, LEA's net sales decreased 2.7% year-over-year to $5.21 billion. Its core operating earnings plunged 45.4% from its year-ago value to $183.7 million, while its adjusted net income declined 52.1% from its prior-year quarter to $108.1 million. The company's adjusted EPS amounted to $1.80, down 51.7% year-over-year.
LEA's consensus EPS is expected to decline 42.9% in the second quarter, ending June 30, 2022. The company's shares have plunged 32% in price year-to-date and 33.4% over the past year.
LEA's POWR ratings are consistent with this bleak outlook. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
LEA has rated a D grade for Growth. Within the C-rated Auto Parts industry, it is ranked #51 of 69 stocks. To see additional POWR Ratings for Value, Stability, Quality, and Momentum for LEA, click here.
1-800-FLOWERS.COM, Inc. (FLWS)
Headquartered in Jericho, N.Y., FLWS and its subsidiaries offer gifts for various occasions in the United States and internationally. It operates through consumer Floral & Gifts; Gourmet Foods & Gift Baskets; and BloomNet segments.
For its fiscal year 2022, the company slashed its sales growth to 3% -5% from the previous expectation of 7% - 9%.
During the third quarter, ending March 27, 2022, FLWS' total revenues decreased 1% year-over-year to $469.58 million. Its operating loss increased 8397.1% from its year-ago value to $26.26 million, while its net loss came in at $23.41 million compared to $1.43 million in net income in the prior-year quarter. The company's loss per share amounted to $0.36 compared to an EPS of $0.02 in the previous period.
FLWS' EPS is expected to remain negative in the fourth quarter, ending June 30, 2022. The $486.91 million revenue estimate represents a 0.02% decline in the fourth quarter, ending June 30, 2022. The company's shares have declined 58% year-to-date and 69.3% over the past nine months.
FLWS' weak fundamentals are reflected in its POWR ratings. The stock has an overall D rating, which equates to Sell in our POWR Ratings system. The stock has an F grade for Growth and a D grade for Momentum and Sentiment. In the F-rated Internet industry, it is ranked #50 of 72 stocks.
In addition to the POWR Ratings grades I have just highlighted, you can see the FLWS rating for Value, Quality, and Stability here.
LEA shares were trading at $125.47 per share on Thursday afternoon, up $1.14 (+0.92%). Year-to-date, LEA has declined -31.04%, versus a -17.60% rise in the benchmark S&P 500 index during the same period.
About the Author: Spandan Khandelwal
Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.
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