The novel coronavirus may be a boon for big box stores. That’s evident as stocks like Walmart (NYSE:WMT), Costco (NASDAQ:COST) and others trade at prices at or above their pre-outbreak highs. But for many retailers and retail stocks, things are not so peachy keen.
Many retailers face continued store closing due to being classified as “non-essential businesses.” Some may see a bit of relief from their online presence. However, retail foot traffic was their primary source of revenue. As stores remain closed, very little money in coming through the door.
For most retailers, this risk is now clearly reflected in their share prices. Using financials from the past twelve months, these retail stocks look dirt cheap. Yet, who’s to say these names will fully recover after the virus is no longer a threat? In short, it’s no slam-dunk to bottom-fish in this sector right now.
However, beyond the “deceptively cheap” retail stocks, there are many names that remain overvalued. Even as cash burn continues due to stores sitting idle. As investors are not pricing-in “worst case scenarios” for these stocks, they could go lower if these continue to be tough.
Looking at publicly-traded retail stocks, these five come to mind ones to sell as their stores remain closed:
- Burlington Stores (NYSE:BURL)
- Five Below (NASDAQ:FIVE)
- Lululemon (NASDAQ:LULU)
- Ulta Beauty (NASDAQ:ULTA)
- Under Armour (NYSE:UA, NYSE:UAA)
Let’s dive in, and see why these five could head lower as the pandemic and “social distancing” continue to affect their operations.
Retail Stocks to Sell: Burlington Stores (BURL)
Back in March, I included this discount retailer as one that could head lower due to the coronavirus. And yes, shares did take a big dip. During March, shares fell from prices above $200 per share to as low as $105.67 per share.
But, the company’s shares have rebounded in recent weeks. Shares now trade around $190 per share. Yet, has anything changed with BURL stock? All of the discounter’s locations have been temporarily closed. If you’re thinking the company’s online presence could minimize cash burn, think again: the company shut down its e-commerce platform just before the outbreak.
So, why has Burlington stock rebounded instead of lingering near 52-week lows? Perhaps investors put this retailer in the same camp as Ross (NASDAQ:ROST) and TJX Companies (NYSE:TJX). However, you can buy both rivals at lower forward price-to-earnings (P/E) ratios.
In short, as it remains uncertain if and when bricks-and-mortar retail will come back, why pay a premium valuation for a discount retailer? As stores remain closed, sell this stock ASAP.
Five Below (FIVE)
FIVE stock has been a rare success story amidst the “retail apocalypse.” Their success is thanks to their ability to take the “dull” dollar-store concept, and make it something palatable for younger demographics.
But, the pandemic has been the proverbial fly-in-the-ointment. With stores shuttered indefinitely, Five Below’s growth story may be over. Yes, the company has an online presence. But, this may not make up for the potential cash burn from store closures. Also, even if things pick up quicker than anticipated, you can’t deny this major headwind is going to affect the company’s prior growth trajectory.
The pandemic-driven sell off of FIVE stock partially reflects this change. Shares fell from around $115 per share when the outbreak first hit America, to prices below $50 per share when pessimism peaked in U.S. equity markets. Shares have rebounded in the month-or-so since, though, with the stock now trading around $90 per share.
Yet, this discounted valuation may not fully reflect how much the situation has changed for Five Below. Shares trade at forward price-to-earnings ratio of 25.7. Why pay such rich prices for uncertainty, when other struggling retailers sell at lower valuations?
Bottom line: There are plenty of reasons why the selloff isn’t over yet for the trendy retail chain.
This athletic-wear giant’s shares have taken a hit since the pandemic first made headlines. But with LULU stock making a big rebound since March, there’s still good reason why it could fall back to prior lows.
Granted, the company may have a bigger online presence than some of the other retail stocks mentioned in this article.
That said, though, online made up only a quarter of Lululemon’s sales in 2019. Sure, maybe in the “stay at home” economy, sales previously conducted in real life have moved online. But it’s tough to believe the premium brand is at the top of American household shopping lists.
InvestorPlace’s Dana Blankenhorn said it best in his April 21 article on LULU stock. While conceding the company’s long-term prospects remain strong, near-term, “premium clothing is out of fashion.”
But despite this, shares continue to trade at premium prices. Lululemon shares trade for a staggering 50.3 times forward earnings. However, there could be good reason behind the stock’s rich multiple.
Susquehanna’s Sam Poser remains upbeat, believing the company’s digital business remains strong. The analyst sees Lululemon coming out stronger once the pandemic subsides.
In short, it could be risky to bet against a LULU stock recovery — something our own Louis Navellier said could be “extraordinarily profitable.” Yet, continued store closures and a premium valuation could mean shares head lower; At least, in the short-term.
Ulta Beauty (ULTA)
Like Lululemon, this is another “retail winner” who could see a reversal of fortune thanks to the pandemic. Shares fell more than 50% when the crisis began. But, as markets recovered, ULTA stock bounced back from $124.05 per share to around $215 per share today.
However, as seen with the names mentioned above, has anything changed for the beauty products retailer? The company’s stores remain temporarily closed. Sure, the company’s growing online sales presence is still in motion. But, given e-commerce made up just 12-13% of sales, bricks-and-mortar remains their main revenue stream.
Granted, the company’s omnichannel strategy — coupled with their loyalty program — could mean the company can move some in-store sales online during the pandemic. But, is this enough to salvage the company in the near-term? I’m doubtful.
Sure, Ulta could pick up more cosmetics customers if floundering old-school retailers go bust. On the other hand, with teenage cosmetics spending hitting a 10-year low, chances are sales won’t “return to normal” immediately after stores re-open.
ULTA stock’s rich valuation (30.3 times forward earnings) seems tough to justify in light of current troubles. Sell now, before more bad news gets priced into the stock.
Under Armour (UA)
If you’ve kept up with continuing coverage from our own Matt McCall, you know full well it may be “game over” for the formerly-hot athletic-wear giant. The coronavirus just accelerates bad times for UA stock. Even as shares have cratered more than 50% since February.
Not only are the company’s chickens coming to roost due to poor management and complacency. With all professional sports on hiatus, expect the company’s top-line to take a hit in the near-term.
But isn’t this also impacting Nike (NYSE:NKE) stock? That’s true. However, consider how Nike is in a better position to ride out the pandemic. Given Nike already had the upper hand versus Under Armour pre-coronavirus, this mean tougher times for the company. Even after coronavirus is over and done with.
UA stock may look like a great place to bottom-fish. But instead of a rebound, investors could see further deterioration in the company’s business in future years. In other words, if you own this stock, sell it, pronto.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.