It’s that time of year again when the weather is a little colder, but hearts are a little warmer. It can also be a pressured-filled season, where many companies like GameStop Corp. (NYSE:GME) and Signet Jewelers Ltd. (NYSE:SIG) are heavily leveraged toward winter sales. Yet retail stocks can do really well so long as they outperform on Black Friday or Cyber Monday. That’s becoming less of a sure thing, however.
The National Retail Federation released its data for the Black Friday weekend — it doesn’t look great. According to Bloomberg, while the “number of shoppers grew over the weekend, the average amount spent fell 3.5% to $289.19, including both online and offline purchases.”
There’s also the unsightly matter of declining consumer sentiment. Sure, the latest data points to an uptick in sentiment over October’s awful month. But looking at immediate-term data exclusively can cause an optical illusion. For example, since 1978, the consumer sentiment index averages around 85 points. But in the current decade, the index averages 80 points. Dubiously, this decade is by far the worst, strengthening the case that there are several retail stocks giving up the grinch this year.
I don’t want to give the impression that it’s all bad news for the sector. Retailers like AutoZone, Inc. (NYSE:AZO) should benefit thanks to their steady, secular demand and position in the markets. But they’re starting to become more the exception than the rule. Amazon.com, Inc. (NASDAQ:AMZN) is taking no prisoners among the competition, which suits consumers just fine. Also, soon-to-be President Donald Trump will have a lot of work to do before a majority of Americans feel comfortable with the economy.
A combination of pressure points puts embattled retail stocks in an even bigger hole. Will they climb out? The risks likely outweigh the rewards. Here are three stocks to avoid this holiday season.
Retail Stocks to Avoid: Sears (SHLD)
Even compared against distressed retailers, Sears Holdings Corp (NASDAQ:SHLD) is an absolute mess. How else to explain articles like the one Forbes recently ran entitled, “Sears’ Biggest 2016 Sale? Its Stock.”
Through a series of bad business decisions and poorly executed restructurings, Sears went from an industry giant to a shriveled shell of its former self. Indeed, SHLD is a cautionary tale for retail stocks overall.
As an extremely speculative investment, I was curious to see if their new ideas — in particular, their appliance-centric store experiments — would gain traction.
Sears stock is down more than 42% year-to-date, so the answer to my question is “no.” Business Insider argues that the answer is really “heck no!” Key executives have left SHLD, and there are growing rumors among interested parties that Sears is going bankrupt. The company denies this, but who are they kidding?
You don’t need to be a certified market technician to realize the ugly in the Sears stock chart. The only saving grace here is the possibility of a bounce from the bottom. But timing those things is always a tricky proposition.
With shares bouncing all over the place, SHLD has become a very expensive penny stock. An off-chance rally is possible, especially if they offer some good news for their upcoming earnings report. However, this might be a case of beating a dead horse.
It really comes down to this: When shopping for deals on Wall Street, Sears is the king of retail stocks to avoid.
Retail Stocks to Avoid: Smart & Final Stores (SFS)
During this hit-or-miss holiday season, it’s reasonable to assume that food and supplies stores would make out okay. However, a strong dollar — among several other factors — have contributed to record food price deflation. Some companies have absorbed the pressure well. Others, like Smart & Final Stores Inc (NYSE:SFS), leave a lot to be desired.
First off, some of the fundamentals for SFS stock are worrisome. Primarily, the profitability margins are very low, even against retailers that are highly exposed to the grocery business.
Because of these poor margins, shares of Smart & Final Stores is overvalued against both trailing earnings performance, and direct competitors. That’s a tough situation to be in, particularly when shares are down almost 30% YTD.
But the more pressing concern is Amazon. The e-commerce giant won’t let up. It’s not satisfied with its dominance in consumer retail, and will soon impact grocery stores. That’s bad news for SFS, which is already underperforming against traditional grocers. With Amazon adding nifty consumer experiences like their next-generation checkout process, Smart & Final is definitely one of the retail stocks to avoid.
Unfortunately, Smart & Final is a case of an otherwise good organization stuck in a desperately competitive industry.
Retail Stocks to Avoid: Staples (SPLS)
Staples, Inc. (NASDAQ:SPLS) is a classic case of stocks to avoid. From a complete outsider’s perspective, it might not appear so. Ever since Donald Trump took the White House, Staples stock has soared to a 27% gain in the markets.
That’s one of the more remarkable examples of the so-called “Trump rally.” Could it be that the real estate mogul turned President-elect will make SPLS great again?
Personally, I wouldn’t expect lightning to strike twice. Yes, stranger things have happened — including Trump becoming President-elect — but surely, there is a limit to the insanity? After multiple rejections over its failed takeover bid of Office Depot Inc (NASDAQ:ODP), there’s not much room for Staples to run.
They can close more stores and do all the things that desperate companies do to avoid further damages. But by cutting its assets, SPLS would gut the very purpose of an all-in-one office supply store.
For all retailers, too much leverage to Black Friday promotions is a red flag. For Staples, it’s the fact that its future seemingly lies in the hands of another competitor and the federal government. These are elements well out of the control of SPLS. Furthermore, the piranha that is Amazon is always lurking. The momentum is on their side, and Staples stock doesn’t have good answers.
Maybe lightning will strike twice — then again, maybe it’s just better to leave SPLS on hold.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
