If you visit any business-related website, you’ll inevitably come across articles forecasting the demise of Sears Holdings Corp (NASDAQ:SHLD). While aggressive short recommendations are rare due to the markets’ upward bias, the bearish position on SHLD justifies itself. Last year, Sears stock lost daring investors 53%. This year, it will lose even more, becoming the worst performer among retail stocks.
Don’t applaud me for putting my neck out there. Sears shed an eye-popping 38% already, and we haven’t even reached the end of the first quarter.
That’s how long SHLD took in 2016 before it even approached such magnitude of negativity. And worst of all, there’s just no way to salvage anything. Sears is so far gone that it would take an unprecedented miracle to right the ship.
We could go over the numbers, but there’s no point. SHLD is too deep in debt, and has failing growth trends both in the top line as well as the bottom. But if we had to pick a metric, I’d look at the revenue multiple defined by the price-to-sales ratio. For Sears, the multiple is a sickeningly absurd 0.03, which is pretty much the lowest among retail stocks. This demonstrates just how little people care about this company. But rather than a single, macabre event, SHLD’s disaster can help save investors from making further mistakes in retail stocks. Sure, retail sales as a whole are rising. In fact, the last time aggregate retail fell into the red was during the 2008 global financial crisis. However, the type of retail business that Sears specializes in — ie., department stores — is imploding.
According to data provided by the U.S. Federal Reserve, department store sales fell by more than 7% last December on a year-over-year basis. Prior to 2016, the average department store’s sales growth was a more palatable decline of 2%. One would have to go back to the aforementioned 2008 crisis to see department stores post a worse performance. It goes without saying that retail stocks levered to department stores are a bad bet. But it’s not the physical platform. The products that such retailers sell — basically clothing and fashion accessories — are doing poorly. Per the Federal Reserve, clothing businesses have essentially flat-lined since late 2014.
Here’s the painful reality — people just aren’t shopping the way they used to. Maybe people already have the clothes that they want, or the shoes that they wear. Maybe Amazon.com, Inc. (NASDAQ:AMZN) killed their appetite for finding parking or waiting in lines.
Whatever the reason, Sears’ collapse is just the beginning for the vulnerable members of a weakened sector. Here are three retail stocks that will see an ugly 2017.
Retail Stocks to Sell: Sears Hometown and Outlet Stores Inc (SHOS)
Selling its organs would certainly buy SHLD time, but go too far, and you’re delaying the inevitable. But with SHOS, this was merely chopping off limbs that have gone gangrene. The individual parts were no longer useful, and the whole would eventually become useless.
If we’re being honest, anything that has the Sears name is a major warning flag. Although SHOS is technically holding up better than SHLD, there is very little comfort in that reality. Last year, Sears Hometown and Outlet Stores lost 45.5% in the markets, one of the worst situations among retail stocks. This year, shares are down nearly 25%, which is dubiously approaching SHLD territory. There just seems to be no floor, other than a big, fat zero.
The fundamentals for Sears Hometown and Outlet Stores are also better than its counterpart, but again, this is another technicality. No matter how you look at it, SHOS is the same dog with less fleas. And no matter what it does, it’s fighting against a consumer trend that is rapidly drifting away from them. At this point, SHOS just provides a delayed entry point for bearish traders.
In other words, those that missed shorting SHLD now have the opportunity to sink Sears Hometown’s boat.
Retail Stocks to Sell: Stage Stores Inc (SSI)
Stage Stores Inc (NYSE:SSI) is the triple threat of retail stocks, or should I say, “triple threatened?” Number one, SSI operates specialty department stores. As previously mentioned, department stores nationwide have recently fallen out of favor.
Second, Stage Stores sells such disposable consumer goods such as accessories and footwear, which again have demand issues. Finally, the company operates primarily in small and mid-sized towns.
For a non-Sears related entity, SSI is remarkably terrible. In 2016, Stage Stores posted a loss in the markets exceeding 50%, slightly pipping Sears Hometown in awfulness. Throughout the year, SSI never found its footing as it dealt with the issues so common among trouble retail stocks. This year, though, investors have had enough. Stage Stores is down 46% against the January opener, and I don’t think it’s getting up.
There are two major concerns here. For the second half of 2016, an argument could be made that SSI was somewhat stable. But with last month’s severe erosion, any sign of technical support has evaporated. When you look to the financials, there’s just nothing there. Literally, Stage Stores is an improved version of SHLD or SHOS. That’s not a good thing — it just means that SSI may stave off bankruptcy for a little while longer.
Whatever the case, contrarian investors should look elsewhere — unless you like to lose a lot of money.
Retail Stocks to Sell: Stein Mart, Inc. (SMRT)
Curiously, the public description of Stein Mart, Inc. (NASDAQ:SMRT) states that it’s a “national retailer offering the fashion merchandise, service and presentation of a department or specialty store.”
Who knows when this was written, but I’m assuming it was during a time when department stores mattered. Today, people use the internet to bring the department store experience to them. As such, SMRT couldn’t be more outdated if it tried.
To be fair, Stein Mart stock didn’t do too bad, at least compared to many other retail stocks. Last year, shares lost “only” 19%. Don’t get me wrong — that’s an awful return on your money. But 19% isn’t 50%. However, things really started to take an ugly turn for SMRT last month. Within a few days of the new year, Stein Mart simply collapsed. So far, SMRT has lost risk takers 36%, and the pain is far from over.
That’s because big-box retail stocks are also knee-deep in the smelly stuff. If a massive entity like Target Corporation (NYSE:TGT) is down 11% for the year, what are Stein Mart’s chances? SMRT has an inferior economy of scale, and it has limited coverage. The company has also ballooned its debt and its financial health is becoming increasingly stressed. Granted, Stein Mart is a cut above Sears, but that’s really not saying much.
SMRT will certainly outlast the worst of the retail stocks, but that won’t save them from the clock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.