Margin Pressures Hurt Specialty Retailers

August 15, 2013, 12:44 pm ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Specialty retailers have been solid performers over the last 5 years. However, margins have been contracting and many of them are trading near 52 wk highs. Let’s take a closer look to see if you should be buying near the highs or selling.

Bed Bath & Beyond Inc. (NASDAQ:BBBY) has seen consistent revenue and earnings increases and the stock has done well this year with YTD returns over 35%. A steady increase of EPS and successful recent acquisitions has fueled the stock increases. However, the company said margins remained soft during the first quarter due to higher operating costs, increase in coupons and their redemption, higher markdowns, and shift in the mix of merchandise sold to lower margin categories.

The stock is currently near long-term resistance according to our real time trading report, and if resistance holds that 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 that item. This attracts different types of customers to its stores. If BBBY starts to shift more towards the lower margin categories they are going to be up against Wal-Mart Stores, Inc. (NYSE:WMT)  and Amazon.com, Inc. (NASDAQ:AMZN).

Given what we know about Bed Bath and Beyond , let's take a look at the low margin players, WalMart and Amazon. Wal-Mart might not offer the same top quality home goods products as Bed Bath & Beyond, but Wal-Mart’s low prices attract the low priced point consumers. The biggest threat comes from AMZN, who 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, people have their smart phones with them while they are shopping, they can just do a quick price comparison on Amazon  to  see if they can get the same product for less.

Investors have to wonder how long Bed Bath and Beyond can survive off coupons and other promotions, which help the company compete with Amazon. If margins continue to slide and they don’t find new ways to compete with Amazon, 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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