When it comes to investing in retail stocks, investors have tons of options to choose from. And like the products retailers sell, the quality of the stocks in the industry wildly vary, which can make the decision on which retailers to buy and which ones to pass on even more difficult than a trip to the mall for a new outfit.
When investing in retail stocks, you should follow the same general principles as any other investments. If you buy quality at a good price, high returns will follow.
But, sometimes, avoiding the bad investments can be just as important as finding the good ones.
Today I would like to point out three low quality retail stocks that investors should be passing on, despite their low stock prices. These three companies all have attractive qualities that could draw in the unsuspecting investor, but their underlying businesses are not performing well.
Here are three retail stocks that aren’t worth your time or money.
Retail Stocks: Coach (COH)
Everyone knows about the historic run Coach (COH) had over the last decade. COH stock performed so well because of how popular its products had become.
And for investors, that’s now a problem.
Coach was once considered a “high-end” retailer. Their bags were fashionable, trendy and priced high enough to make them a luxury item for the masses. Paying a few hundred dollars for a purse gave customers the feeling of exclusivity and luxury.
But that all changed when COH management decided to begin offering its product in outlet stores. For a while, this strategy worked well. Product flew off the shelves, Coach’s revenue dramatically increased for a number of years, hitting $5.075 billion in 2013 and profits rained down, topping off at $3.61 per share that same year.
But, the brand was also changed by this move to quickly boost sales. When prices of COH products dropped and everyone could now afford a “luxury” item, the exclusivity of the product disappeared.
Once the brand fell out of favor, sales quickly began to dry up. In 2014 COH posted revenue of $4.806 billion, and a mere $4.192 billion this past year. Over that same period of time, return on equity fell from 47% in 2013 to just 16.4% in 2015. Return on assets shrunk, operating cash flow began to shrivel, operating margins fell, long-term debt jumped from nearly zero to $879 million in just two years; the list goes on.
Unfortunately, Coach now has a damaged brand, which is much more difficult to fix than the run-of-the -mill retail problems such as an outdated product or missing a particular fashion trend. Investors should steer clear of COH stock for the foreseeable future, despite its attractive 4.55% dividend yield.
Retail Stocks: The Gap (GPS)
The Gap (GPS) is a very interesting company, split into a few different segments of the fashion world, and GPS stock offers investors exposure to a wide variety of shoppers.
GPS has four different brands which target customers of all ages from babies all the way up to the baby boomer generation. As of January 2015, the company operated 3,280 stores total with 1,013 Old Navy locations, 960 Gap stores, and 610 Banana Republic’s in North America alone. These same brands have large stores counts in Europe and Asia, while there are currently 429 franchised locations around the world.
While its diverse composition can sometimes be a good thing, it can also be a big drag when more than one of its brands is struggling. Currently, Banana Republic is really hurting GPS. Last September, Banana’s same-store sales rose 2%, but this year they were down 10%. This is now becoming a trend for Banana after same-store sales figures were off by 11% in August and 10% in July.
But, what is more concerning about GPS is the recently announced departure of Stefan Larsson, Old Navy’s global president, who is heading to Ralph Lauren (RL) to become its new CEO. Old Navy has recently been the shining star of Gap in that it has been able to quickly adjust to fast fashion trends — something most retailers have struggled with over the last few years.
A struggling division combined with the loss of a very strong leader puts Gap in a very scary position. While GPS shares may look like a bargain since they’re down 35% year-to-date, investors should continue shopping for a better deal elsewhere.
Retail Stocks: DSW (DSW)
Shares of discount shoe retailer DSW (DSW) are down more than 30% year-to-date compared to the S&P 500’s fall of just 1%. The bulk of DSW stock drop came after DSW’s last earnings report, released at the end of August, when the company posted growing revenue and earnings per share figures, but missed Wall Street’s expectations.
Furthermore, analysts aren’t expecting DSW to perform terribly well over the next few earnings releases. Quite honestly, neither the does the company itself. Wall Street expects DSW to post earnings of 58 cents per share for the current quarter and 34 cents for the holiday quarter. For those two quarters last year, actual EPS came in at of 56 cents and 35 cents last year. This essentially means zero year-over-year growth for DSW.
If slow EPS growth was a new thing for DSW, I wouldn’t be worried, but it is now a three-year problem. Earnings fell from $2.27 per share in 2012 to $1.62 per share in 2013, $1.65 per share in 2014 and $1.69 per share for fiscal 2015.
DSW’s recent 14% decline in September should be a warning to other investors, not a signal to buy. From a numbers standpoint, DSW is in good shape and may be able to increase EPS growth in the future. But, for now, investors should stay on the sidelines and just wait.
As of this writing, Matt Thalman had no positions in any company mentioned. Follow him on Twitter at @mthalman5513.
