Amid the noise of tax reform, geopolitical tensions and making America great again, one conspicuous element rankles President Donald Trump — the retail industry is suffering from a bifurcated dynamic. On one hand, the e-commerce sector is on a roll. On the other, traditional brick-and-mortar stores are hit with a dearth in foot-traffic. That has plagued formerly prominent retail stocks, moving some to the brink of bankruptcy.
Dramatically poor earnings performances, combined with the hemorrhaging of sales and cash flow, makes this an easy call. As another InvestorPlace contributor, Lawrence Meyers, writes, “Asset sales can only solve so much.” But the worst part is that Sears’ bankruptcy woes affected other unrelated retail stocks.
Without a major entity like Sears, the business model for retail real estate investment trusts (REITs) will spike in difficulty. REITs love these giant firms because they 1) pay “yuge” rental fees and 2) attract other businesses. Losing these whales would intractably stress REITs, and later, the retail stocks of smaller companies.
Although consumer sales volume is up, e-commerce is grabbing a larger share of the pie. That won’t impact sectors such as groceries or home improvement, as these items are purchased on an as-needed basis. However, almost every other discretionary sector, especially including specialty products, is at risk. People no longer want to drive to physical stores when they have the option of shopping online.
Companies without secular demand (ie. groceries) or broad appeal are going to endure a backlash in this new consumer economy. Some names, like Sears, can’t take much more before bankruptcy becomes the only option. Here are four retail stocks that are playing with fire.
Through a very crude mechanism, the film “The Wolf of Wall Street” disparaged the Nasdaq as a second-rate exchange. Although it’s a harsh insinuation, it’s also not entirely untrue. Most firms prefer the lofty status of the top-tier NYSE. But regardless of how you feel, I think we can all agree that getting delisted from the Nasdaq is pretty sad. Yet that was nearly the fate of Bon-Ton Stores Inc (NASDAQ:BONT), a department store operator.
In early March, Bon-Ton received notice from the Nasdaq, which threatened to delist BONT stock from its exchange. BONT failed to “maintain a value of at least $15 million for a period of 30 consecutive business days,” according to The Morning Call. Although the ominous notice was later rescinded, the message was clear — shape up or ship out.
Unfortunately, BONT lacks viable options.
Department stores are hurting across the country. Based on luxury stock performance, such as Dillard’s, Inc. (NYSE:DDS) and Nordstrom, Inc. (NYSE:JWN), the rich are being frugal too. BONT stock, therefore, is in a tight spot. It doesn’t have the brand power of affluence, nor does it have market reach. Bon-Ton primarily operates in the Northwest and Midwest. In order to be competitive, BONT must expand, but lacks the resources.
Sadly, the writing is on the wall. If well-known, affluent retail stocks are troubled, lesser-capitalized firms like BONT won’t make it.
On the surface, Destination XL Group Inc (NASDAQ:DXLG) sounds like an ingenious winner among retail stocks. DXLG specializes in “big and tall” apparel, primarily in the U.S., but also in the U.K. We being the land of McDonald’s Corporation (NYSE:MCD), this is a perfect fit. The American waist line continues to expand, which should in turn ring the registers at DXLG.
Unfortunately for DXLG stock, theory and reality do not mix favorably. I can pull up multiple charts and graphs to make my point if I wanted to. Instead, let’s use common experiences. Personally, I’m incredibly cheap, and I suspect, so are many of you. In any store, the first aisle I visit is the discount bin. The problem with apparel retailers is that the discounts are usually only for gigantic sizes.
Maybe I’m a little too slow to the sale. Regardless, Destination XL is embattled because it has too many competitors. At any point in time, a big and tall person can waltz into any apparel store and find incredible deals. That makes DXLG products not unique in the slightest, and therefore, I’m not surprised by its 39.5% downfall this year.
The pain in retail stocks is far from over, and unremarkable businesses like DXLG may end up in bankruptcy.
The last thing you want to see when looking at a candlestick chart is a giant, red bar. Look up Bebe Stores, Inc. (NASDAQ:BEBE) and that’s exactly what you’ll find. On March 21, BEBE stock lost more than 44% in market value. An announcement by management that the company was shuttering its brick-and-mortar stores caused the fallout.
This specific action was taken to avoid bankruptcy, and close advisors don’t see it happening. In all fairness, who are they kidding? Even Bebe insiders acknowledged that bankruptcy is possible if the retailer landlords won’t negotiate. The only standout positive for BEBE stock is that the company surprisingly has no debt. But considering it’s bleeding sales and margins, no good outcome is feasible.
Based on its current position in the markets, BEBE stock hasn’t moved since late November of 2015. Prior to that, BEBE investors have experienced one catastrophe after another. Without hesitation, the trendy apparel store is one of the worst retail stocks still doing business. In the trailing five years, shares have lost 95% in the markets.
In short, Bebe is a zombie stock. You can spare yourself a lot of misery by not getting involved.
Perfume and fragrances distributor Perfumania Holdings, Inc. (NASDAQ:PERF) is in big trouble. This is quite a remarkable statement considering that we’re discussing retail stocks.
For PERF stock, it has a twofold problem. First, the fashion-related industry has been flat for three years. The last time this sector experienced a horizontal consolidation, it acted as a harbinger to the Great Recession. I’m not suggesting a repeat, but it’s worth a reminder.
Second, department stores represent the most appropriate place for Perfumania products. However, sentiment for such stores are dying. In fact, it’s one of the few sectors which failed to recover from the 2008 financial collapse. While I’m not in the coroner business, I think we’ve passed the point of no return for most retail stocks. If PERF stock should avoid bankruptcy this year, they would only be avoiding the inevitable.
E-commerce establishments like Amazon.com, Inc. (NASDAQ:AMZN) will eat them alive in the online sphere. Low-price leaders will hurt them in the volume game. The higher-end stuff is simply too competitive. At a price tag of basically $1, the writing is on the wall. PERF has lost 30% year-to-date, and more than 63% in 365 days.
I’m all for a good discount, but buying PERF stock now is just a quick trip to bankruptcy court.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.