Retail stocks face pressure as customers spend less. On April 1, the Commerce Department reported that February retail sales had fallen by 0.2%. Moreover, sales declined by 1.6% during December at the height of the Christmas shopping season. For this reason, even the 0.7% sales increase in January failed to bring sales above seasonally adjusted levels.
The rise of e-commerce driven by Amazon (NASDAQ:AMZN) has added to the concerns. Thanks to many brick-and-mortar retailers turning to omnichannel strategies, fears of an “Amazon takeover” have abated. However, shifts in consumer tastes and spending continue as billions of square feet in the retail space lies empty.
Amid slower sales and changing retail trends, investors should think twice about remaining in the following five retail stocks:
At first glance, AutoZone (NYSE:AZO) does not look like one of the retail stocks to sell. Its forward price-to-earnings ratio is about 19.6. Also, even though Wall Street predicts a profit reduction of 1.6% for the year, they see 22.8% in earnings growth for next year. Furthermore, consumers need running cars. Hence they will generally spend what it takes on parts regardless of the state of the economy.
However, trends have emerged that could undermine this recession-proof business. Both millennials and Generation Z have shown a decreased interest in working on their own cars. Moreover, Amazon and other e-commerce retailers have considered entering this business. A smaller customer base and increased competition spell trouble for both AutoZone and its peers.
Another problem plaguing AZO stock involves its balance sheet. Current liabilities have long exceeded current assets, calling into question the company’s ability to pay its immediate bills.
Moreover, rising debt and spending on stock buybacks have left the company with negative stockholders’ equity. This trend continues as management approved another $1 billion in stock buybacks in March. If the company saw a sustained drop in sales, they might have to dump repurchased stock back on the market to shore up the balance sheet. Such a move would devastate AZO stock.
Investors have long viewed the auto parts business as a stable, recession-proof business. However, between a lessened interest in home auto repairs and the poor shape of AutoZone’s balance sheet, investors should sell AZO stock before it experiences its own breakdown.
Bed, Bath and Beyond (BBBY)
Source: Mike Mozart via Flickr
Bed, Bath, and Beyond (NASDAQ:BBBY) has become one of the retail stocks that appears poised to become another victim of the e-commerce onslaught.
The Simpsons once parodied the retailer when it featured a gun store named, “Bloodbath and Beyond.” Unfortunately, that name may describe the worsening state of the company. A long-term debt burden of almost $1.5 billion may have appeared light when the company traded at its 2015 high of around $75 per share. However, BBBY stock now trades at about $17 per share. This has taken its market cap to about 2.3 billion, about 20% below BBBY’s book value.
BBBY stock has moved higher recently as activist investors have taken an interest in the company. Many hope for an omnichannel strategy that succeeded for a company with a similar stock symbol, Best Buy (NYSE:BBY).
Our own Luke Lango states that consumers no longer need Bed, Bath and Beyond as consumers can find their products at a Target (NYSE:TGT) or Amazon at lower prices. I agree. This explains why moves by activist investors to turn around the company will likely fail. Also, even if they find a way to succeed, the benefits may not accrue to BBBY stock. Given the remote chance of recovery, I would recommend running away from BBBY before the real bloodbath ensues.
Like BBBY, GameStop (NYSE:GME) could turn into one of the retail stocks permanently hurt by changing shopping trends. Unfortunately for GME stock bulls, GameStop has become the Blockbuster Video of the gaming industry.
Yes, more consumers are buying games from online retailers such as Amazon; however, I do not think GME can blame Amazon for its woes. How consumers increasingly buy games has become a more serious threat to GME stock.
Today, customers receive more of their games via downloads or streaming media in some cases. This freezes gaming retailers out regardless of how well they run their business. In such a world, the existence of GameStop no longer makes sense.
GME stock has fallen from the high of over $45 per share it saw in 2015 to about $10 per share today. This has taken the forward P/E ratio to around 5. For this reason, some might attempt a contrarian bet.
Yes, activist investors may attempt to save the company. Or, they could find a new line of business that would bring customers back. Still, either strategy has only a slim chance of success.
Sometimes the only way to win is not to play the game. GME stock investors should accept that fact before it is game over.
Macy’s (NYSE:M) has become another venerable store struggling to succeed in today’s retail world. The retailer operates primarily in malls, a retail format that has seen a significant decline in recent years.
As mall traffic has fallen, M stock has dropped as well. Macy’s stock traded at around $70 per share in 2015. Today, M stock trades at just under $25 per share.
In fairness, it has not fallen to the low levels of retail stocks such as Sears (OTCMKTS:SHLDQ) or JCPenney (NYSE:JCP). Also, investors should note that it still earns a profit. Moreover, it generates sufficient cash flows to maintain its $1.51 per share annual dividend. Admittedly, many investors will stay in M stock or even buy it merely for the 6% yield.
However, this dividend, which had increased annually for years, did not rise in 2018. Also, analysts expect little change in revenues for both this year and next. They also forecast that profits will fall by 25.6% this fiscal year (2020) and 4.5% in fiscal 2021. For now, analysts expect shrinking earnings for the foreseeable future. If this decline continues, it could bode poorly for the dividend, and by extension, M stock.
If profits resume their move higher, M stock will become a lucrative bargain. Still, unless and until Macy’s can boost earnings, investors should stay away.
Walmart (NYSE:WMT) successfully fought off the so-called “retail apocalypse,” turning its physical stores and improved online presence into a successful omnichannel strategy. In its latest quarter, U.S. e-commerce sales grew by 43%. WMT stock, which traded close to $57 per share at the height of the fears over Amazon, has now almost reached the $100 per share level. As a result, its forward P/E ratio comes in at about 19.6.
However, outside of the e-commerce improvements, Walmart remains little-changed. Walmart struggles with both market saturation at home and a string of failures trying to expand outside of North America. This remains worrisome as Walmart could find its growth potential limited without a successful offshore strategy.
Also, efforts to improve worker pay and benefits, while probably needed, will likely weigh on profits in the near term. For the overall company, analysts forecast revenue growth of only 2.9% this fiscal year and 3.3% the next. They also expect profits to fall by 3.1% this year before rising by 5% next year.
Walmart will remain one of the largest retail stocks as its successful e-commerce strategy addresses a strategic threat. However, with negligible earnings growth supporting a 19.6 forward P/E, WMT has become overpriced.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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