It’s already here. The sights. The sounds. The red cups. The holiday spending frenzy is once upon us — whether we are ready for it or not. For many retail stocks, this is the most critical period all year. The don’t call it Black Friday for nothing. However, the consumer spending environment continues to get even more cutthroat and hard to navigate.
Thanks to online and omni-channel shopping, mobile commerce, one- and two-day shipping and a host of other reasons, many retail stocks are already suffering. The sector is quickly becoming a bifurcated industry — with haves and have-nots fighting for survival. And the holiday season has only exacerbated this fight. Extra discounting, sales and “door-busters” make a tough environment even tougher.
That means there are several retail stocks that aren’t going to fair too well over the next few months. And in a few cases, they may not be around much longer.
For investors, knowing which companies to avoid can be just as important as knowing which stocks to buy.
And with that, here are five retail stocks that should get a big lump of coal this holiday season.
J. C. Penney (JCP)
After Sear’s bit the dust, it’s easy to dunk on J. C. Penney (NYSE:JCP) as being the next major retail stock to meet its maker. Like Sear’s, JCP is an old-fashioned department store in a world that no longer supports that style of retail concept. Big discounters like Walmart (NYSE:WMT) and e-commerce giants like Amazon (NASDAQ:AMZN) simply do it better. And in that, J. C. Penney has been suffering for years.
The problem is, the suffering may finally be hitting a critical level.
Debt at JCP remains an issue. As of last quarter, the retailer had roughly $3.6 billion in long-term debt on its balance sheet and about $1 billion in operating lease obligations. The problem is that JCP only has about $175 million in the bank and short-term investments. That’s not exactly a great ratio of debt to cash. Nor is that great when sales continue to slide as e-commerce eats its lunch.
Even worse is that sort of debt makes it harder for JCP to expand and update in a meaningful way. Sure, the firm has a new store concept, but it simply lacks the funds to roll it out to a variety of locations. Target (NYSE:TGT) spent more than $7 billion remodeling its stores to make them “hipper” and omni-channel friendly. JCP simply doesn’t have that kind of cash or time.
With JCP already talking to creditors about restructuring its debts, sales continuing to sleep and other rivals getting strong, it’s only a matter of time until the firm has to pack up. For investors, JCP is easily a retail stock to avoid this holiday season.
It’s not that Wayfair (NYSE:W) is a bad choice among retail stocks, it’s just that a few issues may be hitting its torrid pace of growth. In this case, we’re talking about costs across a variety of fronts.
While its revenues have continued to climb, W stock has started to see its margins erode and various costs start to increase. As with JCP above, playing in the e-commerce world is an expensive game. Unfortunately for Wayfair, it’s now being forced to shell out more to keep those revenues climbing.
Last quarter, Wayfair was forced to spend 58.7% more on technology, infrastructure and other expenses related to gathering sales and getting them to consumers fast. Advertising spending jumped more than 12%. Meanwhile, the actual costs of its goods managed to jump as the trade war continues to slog on. All in all, the issues with costs have made U.S. margins a fat negative 3% for W.
That doesn’t instill much confidence heading into a slowing consumer environment. Add in the fact that other rivals continue to spend more in order to boost shipping, fulfillment and ordering ease, and you start to see a worrisome picture for Wayfair. No wonder why shares cratered the day it announced its results and poor outlook.
W stock isn’t a bad retailer overall. It’s just that the firm is dealing with some things outside its control. And because of that, it could be rocky for the firm going forward. Shares may still have more room to drop.
The middle isn’t exactly a great place to be these days. Consumers either want high-end products or deep bargains. For retail stocks offering clothing like the Gap (NYSE:GPS), this is a tough pill to swallow.
Sales continue to decline at Banana Republic and Gap as these brands struggle to find an audience.
The bright spot for GPS stock has continued to be its bargain-brand Old Navy. These days, Old Navy accounts for roughly 50% of Gap’s total sales — with the other brands bringing in the rest — around $7.9 billion from Old Navy against $8.7 billion for the other brands. But the pace of revenue growth at Old Navy has been brisk.
To that end, GPS has decided to spin out Old Navy as a separate company. And that might seem like a good idea at first. The problem is, Gap really needs those assets to keep the ship moving. GPS is profitable at its other brands, but their slow decline is a spot for concern. Secondly, the hallmark of Gap’s online operations has been the one-bag integration of all its brands. Picking up incremental sales and cross-selling has worked in its favor.
What’s worst is that even execs at Gap aren’t sure of the spinoff plans. CEO Art Peck abruptly resigned from the company.
With reduced guidance, slowing traffic and no real plans to get out of its funk, GPS is one retails stock that will continue to face some big issues. Those issues will take center stage during this holiday season.
Chico’s runs a variety of stores — including its namesake, Soma and White House Black Market. Generally, these brands fall under the higher-end and casual work clothing umbrellas. The problem for CHS is that this sort of style really isn’t in focus anymore with millennial and Generation Z shoppers. With joggers now an office staple and bralettes replacing traditional intimate apparel, Chico’s is facing a real problem. It doesn’t have a core audience anymore. The Boomers are gone and the younger generations aren’t buying.
Last quarter alone, sales declined by 6.1%. This follows the trend of continued lower quarterly sales figures.
Like many of the retailers on this list, CHS is realizing these lower sales at a time when debts and costs have risen. Thanks to its high-end nature, most of its store frontage is in upper-scale malls. Thanks to this, rent expenses are higher and produces more drag on its bottom line. No wonder why Chico’s has started closing stores — 53 have closed over the last three months.
In the end, Chico’s is a brand without any buyers. With no real plans to turn the ship around, CHS stock could be a real drag this holiday season.
Pennsylvania Real Estate Investment Trust (PEI)
If many retail stocks are suffering, then the owners of malls and shopping plazas must be really feeling the heat. Pennsylvania Real Estate Investment Trust (NYSE:PEI), also known as PREIT, is a prime example of the carnage being felt by the mall owners.
PEI started out as a sprawling regional mall operator and as the recession hit, it took great steps to improve its portfolio of properties. That worked in raising its average sales per square foot and boosting quality of tenants. This worked great and the stock rebounded.
And then the bottom dropped out for PREIT.
This year, we’ve seen a variety of retailers such as Payless, Gymboree, Things Remembered and now Forever 21 file for bankruptcy. All of which are fodder for PREIT’s style of malls. These closes are starting to once again hurt PEI’s bottom line.
For the third quarter, PREIT saw its same-store net operating income decline by 5.8% year over year. That decline doesn’t exclude lease terminations. And with that, decline, funds from operations — or the cash that the REIT has to deliver to investors as dividends — dropped by 34% year-over-year. This follows a 44% year-over-year decline in FFO for the second quarter.
PEI stock and its juicy 14% dividend is in trouble. This proves that the carnage in retail stocks is wide reaching.
At the time of writing, Aaron Levitt had a long position in AMZN.