Tractor Supply Company (TSCO), Bed Bath & Beyond Inc. (BBBY): Have These Stocks Lost Their Luster?

Top and bottom-line expansion helped the entire retail sector rally last year. While the story of earnings growth is still intact with many stocks, there are some that have lost their luster either due to the fact that most of the earnings visibility has already been priced into the stock, or the company doesn’t have a definitive strategy to achieve its targets. Let’s have a look at the following retail stocks.

Tractor Supply Company (NASDAQ:TSCO): A solid performer in 2012, the Street continues to see upside in this name, but following the strong Q4 beat the upside is now somewhat limited. While the stock looks pricey on valuation, the ingredients for earnings upside remain in place. What 2012 showed investors is that this is a sustainable growth story from a top-line perspective, given its physical and market share growth. Tractor Supply Company (NASDAQ:TSCO)’s niche market, solid value proposition, and increasing share of the feed market is expected to continue to drive strong comps. In 2013, solid top-line growth should be supplemented by improving gross margin on easy compares, consistent SG&A leverage, and increasing share buybacks. One risk to the story is that gross margin has been inconsistent over the past few quarters, partially due to temporary issues but also due to a greater mix of consumable (CUE) products, which have higher freight costs. That higher mix is compromising the company’s stated goal of 20 bps of gross margin expansion per year, a goal that has attracted investors to this story. An optimistic earnings scenario for 2013 implies less than 20% upside from here.

Bed Bath & Beyond Inc. (NASDAQ:BBBY): There seems to be a lot at stake for BBB in 2013. Coming off a couple years of outsized results followed by a lackluster finish to 2012 has left the market questioning whether the near term is just a bump in the road or a warning sign of more slippage to come. BBB is one of the most consumer centric companies on the market, with an unrelenting focus on the customer and store experience. The management is also among the best in the retail industry. However, BBB is focused on the long term and does not manage for the short term. While BBB is going through an investment period with the acquisition of Cost Plus, investments in e-commerce may not be a positive signal for the near term. Most investors have been confused about the company’s future strategy.

The key unanswered questions are what is the plan to put World Markets in Bed Bath & Beyond Inc. (NASDAQ:BBBY) stores, and what do these stores comp and earn? What are the longer-term growth plans for Buy Buy Baby and Cost Plus? On margins, will they stabilize by Q1 next year or are the couponing and mix issues becoming even bigger? An important positive for this stock is that the lack of visibility has made it inexpensive. However, that may not be a bullish sign at all given that the market has seen other inexpensive stocks become even cheaper as margins cratered. In the near term, the guidance points to margin pressure, but it seems that the stock already reflects that. Credit Suisse has a target price of $70.