The stock market hemmed and hawed on Monday, unable to make a strong move in either direction. A limited trade deal announced by President Donald Trump is apparently not yet in the bag, with Bloomberg reporting that China wants to hold more talks before finalizing the agreement.
Data source: Yahoo! Finance.
Shares of SmileDirectClub (NASDAQ:SDC) and Tapestry (NYSE:TPR) were able to make strong moves, both in the wrong direction. Legislation in California was viewed as a big negative for SmileDirectClub, while an analyst downgrade pushed Tapestry stock lower.
SmileDirectClub runs into trouble in California
The dental industry isn’t all that keen on SmileDirectClub and its low-cost aligners. The American Dental Association and the American Association of Orthodontists have filed complaints against the company in dozens of states, accusing SmileDirectClub of violating regulations.
The regulatory picture for SmileDirectClub became even more complex on Sunday when California Gov. Gavin Newsom signed Assembly Bill 1519. While the bill doesn’t require SmileDirectClub to cease or modify its operations, according to the company’s statement, it will “create unnecessary hurdles and costs to Californians that need care but struggle to afford it.”
“Simply put, this bill represents the dental lobby’s thinly veiled attempt to protect traditional dentistry at the expense of Californians,” continued SmileDirectClub’s statement. The stock was down 10% at 1:30 p.m. EDT in response to the news.
A SmileDirectClub aligner box. Image source: SmileDirectClub.
A silver lining for SmileDirectClub was Newsom’s signing statement, which indicated that the Governor disagreed with the methods by which the policy changes were enacted. The bill extends the Dental Board of California’s authority to oversee and regulate dental services, but it also introduces changes that don’t belong in such a bill, according to Newsom; “I will not look favorably upon any future regulatory sunset bills that includes those provisions,” his statement concluded.
How this all shakes out remains to be seen. SmileDirectClub stock has been hammered since the company’s disappointing initial public offering in September, partly due to regulatory concerns. Investors are clearly not happy with this latest development.
Tapestry downgraded for multiple reasons
Tapestry, the company behind the Coach, Kate Spade, and Stuart Weitzman luxury brands, was hit with more bad news on Monday. Sluggish revenue growth has weighed on the stock over the past year — shares are down more than 40% from their 52-week high. An analyst downgrade on Monday added fuel to the fire, sending the stock 2.8% lower by 1:30 p.m. EDT.
Analysts at UBS are concerned about Tapestry for a few reasons, prompting a downgrade from “buy” to “neutral.” First, UBS views the resale market for luxury items as a significant threat, effectively putting a lid on the company’s pricing. UBS sees little potential for positive earnings surprises or expansion of the stock’s beaten-down price-to-earnings ratio.
Second, the Kate Spade brand hasn’t lived up to expectations. It was acquired in 2017, but the acquisition has so far been a dud. Comparable-store sales tumbled 6% in the fiscal fourth quarter at Kate Spade, and that included a positive impact of 6 percentage points from e-commerce. UBS sees the turnaround at the brand potentially taking years.
While analyst upgrades and downgrades are often nothing more than noise, UBS isn’t wrong about the problems plaguing the luxury company.