With the number of coronavirus cases in Italy totaling over 31,500 with 2,500 deaths, many analysts anticipate that the country will fall into a deep recession. Yeah, no kidding! Though the Italian government took extreme measures to combat the outbreak – including a nationwide lockdown – infection cases continue to grow at a double-digit clip. And what’s happening over there certainly is a harbinger for retail stocks in the nearer term.
“Despite all the talk about a ‘retail apocalypse,’ retail is not dead,” said Michael Solomon, Ph.D., professor of marketing at Saint Joseph’s University, in an email to InvestorPlace. “However, parts of it are on life support (and the coronavirus panic won’t help in the short term as people start to avoid shopping in stores).”
First, despite every fiscal weapon that the U.S. Federal Reserve has thrown at the crisis, the central bank’s actions have failed to decisively calm the markets. In my opinion, that signals that the volatility is deeply rooted; it’s not something that you can magically whisk away. To be fair, the Trump administration is looking at unprecedented stimulus plan which temporarily lifted sentiment. Theoretically, such stimulus should be optimistic for the market.
Judging by how quickly people panicked, I’m rather skeptical. Obviously, fears over the coronavirus – rather than the virus itself – has ground our economy to a halt. Frankly, it’ll take considerable effort to rejig investor and consumer confidence. Further, what would a one-time emergency payment do for the American people, especially if we ourselves go into a recession? I’d argue not much, and it probably won’t move the needle for retail stocks.
Second, we only need to scale up cyberattacks to recognize the damage awaiting us. Typically, addressing a cyberattack has two components: the damage of the attack itself and the opportunity cost, such as lost productivity. Of course, we can’t make up that lost time, which makes this crisis worrying.
Now, not every retailer is doomed. As Solomon pointed out, to survive, “Retailers need to do a better job of understanding how and why consumers become passionate about certain brands while others leave them cold. One clue is that continued personalization will heighten engagement, as will enlisting consumers as co-designers so that retailers market with shoppers rather than to them. ”
Some of them can make these changes, but some probably won’t. Therefore, it’s sadly time to be realistic and avoid these nine stocks in the retail sector.
Best Buy (BBY)
Personally, including Best Buy (NYSE:BBY) on this list of retail stocks to avoid is painful. Among the still-relevant brick-and-mortar retailers, Best Buy is my favorite. Along with buying my computing necessities on the fly, the store is an experience, offering myriad product categories. But in this atmosphere, BBY stock fails the demand equation.
With so many people flocking to their local grocery and warehouse stores, not much concern for the latest gizmos and gadgets exist. And with Apple (NASDAQ:AAPL) closing their stores “until further notice,” this message suggests that not many people are interested in what Best Buy has to sell. It’s just a nasty situation all around, which is why you should avoid BBY stock until the smoke clears.
For once-iconic department store Macy’s (NYSE:M), the company faces two huge problems. First, M stock must somehow overcome the “why” problem. Said another way, why would you go shopping at Macy’s? It has nothing you need right now. Obviously, the coronavirus doesn’t care whether you’re wearing designer jeans or some knockoff brand.
The second problem plaguing M stock is the health aspect. Cynically, if you want to practice social distancing, you might as well do it at the mall. Cheap joking aside, you’ll still have many people there breathing the circulated air. Furthermore, you’ll have to touch mundane objects like door handles and what not.
And again, why would you subject yourself to this unnecessary risk? The inability to provide credible answers makes this a rather toxic name among retail stocks.
Bed Bath & Beyond (BBBY)
In a way, you’ve got to feel for the team behind Bed Bath & Beyond (NASDAQ:BBBY). What was once a trendy home goods retailer has fallen out of favor with consumers over the years. Nevertheless, BBBY stock made a huge run in the second half of 2019. Positive momentum in the U.S.-China trade war further bolstered shares.
Now? BBBY stock printed all kinds of ugly on its technical chart. Sure, I can give you the year-to-date loss (68%, for posterity’s sake) but it’s a figure I see declining more. Even before the coronavirus panic struck, Bed Bath & Beyond suffered from a consumer preference shift. Rather than buying artsy dinnerware, for instance, consumers prefer simple, solid-color designs that anyone can make.
Logically, this loss of product differentiation makes BBBY one of the retail stocks to avoid.
Dollar Tree (DLTR)
Frankly, I’m disappointed with how Dollar Tree (NASDAQ:DLTR) has turned out. On paper, you’d assume that dollar stores would at least perform reasonably well during periods where a recession was on the table. Unfortunately, DLTR stock is down by significant double-digit figures despite jumping on the aforementioned stimulus news.
My thinking was that this was too much of a shock to the system for Dollar Tree. While the retailer should outperform other pricier competition, a complete meltdown doesn’t do anyone any good. Further, many folks shopped at Dollar Tree to wipe out its inventory of toilet paper and hand sanitizers. But now it doesn’t have much to offer its core customers, which is a negative for Dollar Tree stock.
Although a part of me believes that shares will recover, Dollar Tree has faded like other retail stocks. As such, I’ll listen to the markets rather than second guess my way into a position.
Dick’s Sporting Goods (DKS)
With the coronavirus shutting down major sporting leagues, Dick’s Sporting Goods (NYSE:DKS) is on the ropes. In a truly horrific first calendar quarter of the year, DKS stock simply imploded. Honestly, what is the retailer going to do? It had the NBA Playoffs coming up, along with the start of the baseball season. Ordinarily, this is a great time to sell replica jerseys. But with consumers closing their wallets and their doors, DKS is easily one of the retail stocks to sell.
But in a way, the company deserves this pain. Not too long ago, Dick’s made a Dick’s move by destroying $5 million worth of assault rifles. Those firearms could have been sold at a rich premium today, with Americans flocking to buy guns. Of course, management felt that virtue signaling was more important than profitability.
It just might cost them their jobs.
CVS Health (CVS)
CVS Health (NYSE:CVS) is another one of those confusing, unintuitive retail stocks. Essentially, you’d assume that CVS stock would soar under current conditions. Once word started spreading that the disease known as Covid-19 was ravaging America, everyone panicked. Today, you won’t find any over-the-counter medicines unless God himself gave you a package.
While that’s an immediate sales boost, it does nothing for recurring business. And let’s face it: CVS, like most retailers, are high-volume entities. They’re not built for a one-off spike purchase event. Therefore, CVS stock took a beating.
Further, the shock of the badly sputtering American economy is too much for most retail stocks to bear. With government authorities failing to decisively calm markets, CVS may experience some turbulence before getting better.
Abercrombie & Fitch (ANF)
I’ve picked Abercrombie & Fitch (NYSE:ANF) in my list of retail stocks to buy but the name is very replaceable. Put Gap (NYSE:GPS) or American Eagle Outfitters (NYSE:AEO) or any other surviving competitor in the trendy apparel space; honestly, it doesn’t matter. Prior to the pandemic, ANF stock was already troubled.
Primarily, the biggest contributing factor is that consumer trends have changed. Fewer people care about gaudy fashion accoutrements. Instead, simplicity and authenticity is in. But that hurts product differentiation opportunities because it’s hard to make fashion simple and distinct.
And now, with the coronavirus wreaking havoc on consumers’ sensibilities, I’m not sure how ANF stock can recover. Currently, the underlying company is shedding money it can’t afford to lose. When this virus fades into the rearview mirror, management may still have to deal with lingering economic repercussions.
As a big-box retailer, you’d expect Target (NYSE:TGT) to soar in the markets. After all, people are flooding into their stores to buy not only food but all the home essentials. Once the brand-name products are gone, consumers will ravenously take the Target-owned brands. Beggars can’t be choosers, which theoretically bodes well for TGT stock.
However, this is one of those cases where theory doesn’t quite match reality. In fact, it’s completely disjointed, with TGT stock taking a beating. Why would this be? On one hand, it’s awesome that Target has become a one-stop-shop for all your needs. But on the other hand, consumers only want the essentials: toilet paper, food, water, and more toilet paper.
Because you can’t wipe your rear with an iPhone, TGT is still a risky name among retail stocks.
JC Penney (JCP)
For some companies, the coronavirus is a black swan event. For others, it’s merely accelerating the inevitable. JC Penney (NYSE:JCP) belongs in the latter category. Out of all the retail stocks on this list, I believe that JCP stock faces the greatest risk. Granted, that’s not saying much. Still, I’d be very surprised if the underlying company is still a thing after all this.
As I mentioned above, several retailers – not just Macy’s – are suffering from the “why” problem. Bluntly speaking, there’s absolutely no reason to shop at JCP, with or without the coronavirus.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.