In the past two weeks we’ve seen nearly 10 million people file for unemployment.
All of them are consumers, and our economy relies on consumers for about 70% of its growth. When people aren’t spending in the US, it’s tough for everyone, especially consumer-facing companies that were the beneficiaries of much of that disposable income.
Some will make it through. Others will have trouble adapting because they have been in growth mode and are currently leveraged. Others have been trying to secure a foothold in the new world of e-commerce and hadn’t quite found the right solution. And this was all when times were good.
These seven retails stocks to keep your distance from are either over-leveraged or are going to find it even harder to keep their businesses viable during this difficult time. Either way, these aren’t the stocks to buy during this correction:
- Gap (NYSE:GPS)
- Kohl’s (NYSE:KSS)
- Nordstrom (NYSE:JWN)
- Companhia Brasileira de Distribuicao Grupo Pao de Acucar (NYSE:CBD)
- Walgreens Boots Alliance (NASDAQ:WBA)
- Tapestry (NYSE:TPR)
- Ulta Beauty (NASDAQ:ULTA)
All these stocks get overall “F” or “D” ratings from my Portfolio Grader tool I use to find Growth Investor plays.
Retail Stocks to Avoid: Gap (GPS)
Gap has been around since 1969, beginning life as a jeans company before building an enormous business and reliable customer base over the decades.
It then began to grow its coterie of brands. It now owns Old Navy, Banana Republic, Athleta and Intermix. The latter three brands are more upscale and have had a tough time catching on in recent years.
The toughest part has been building these brands after the 2008 Great Recession. A lot of disposable income was wiped out back then, and the same is true now.
Gap and Old Navy may be able to pull more weight, but it likely won’t be enough. Plus, it’s a big company and that means lots of leases and employees, which certainly won’t help. And generating cash will be even more difficult now that the company has furloughed most of its workers.
Kohl’s Corp (KSS)
Kohl’s is currently throwing off a 24% dividend. That may be a signal of how hard the stock has been hit. It’s off 76% over the past 3 months and 83% in the past year.
Like other large retailers, it has furloughed its workers and recently drew down $1 billion on its revolving credit line. But this is as dangerous as a consumer maxing out his or her credit cards after getting laid off.
There’s no telling when that next paycheck will come and the debt needs to be serviced.
This Wisconsin-based department store seems to have made its move to the national stage a bit late. As it was trying to compete, department stores were losing their allure and the transition to online shopping was beginning.
It’s going to be tough to recover, especially if this lockdown lasts longer than expected. I’m all for dividends, as my Growth Investor readers can tell you, but that yield is earned by growth — not created by a share price in freefall.
Nordstrom has been around since 1901 and while it’s public, it’s still run by the family. This certainly helps keep some sense of responsibility to the name and reputation alive during these trying times.
The company has suspended its dividend; the board is forgoing compensation; and the leadership is also cutting its salaries to help.
But this is one of those big names that got caught transitioning from its traditional upscale department store model into upscale niche stores and got caught midstream. And now sales are weak across the board, with more brands to manage.
That’s not a good place to be. The company has furloughed some workers beginning April 5, and will look to extend that in coming weeks, which may be necessary with state-mandated lockdowns growing.
It may well survive, but JWN will be a very different company if it does.
Companhia Brasileira de Distribuicao Grupo Pao de Acucar (CBD)
Companhia Brasileira de Distribuicao Grupo Pao de Acucar is essentially the Walmart (NYSE:WMT) of South America. The company has been around since 1948 and it’s the second biggest retailer in Latin America and the second biggest online retailer in Brazil.
This size is usually a distinct advantage when it comes to people switching their spending habits. But emerging markets are typically hit much harder than developed markets due to the fact that their economies are reliant on the developed economies for much of their fundamental business.
If Brazil isn’t exporting soybeans or oil, that has a significant effect on its domestic economy. Also, the French retail group Casino is a big shareholder in the company and with Europe also in trouble, it’s hard to see how things aren’t going to get worse before they get better.
At Growth Investor we’re focusing much more on U.S. opportunities and select stocks overseas that rate highly on my key precursors to long-term growth.
Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance is one of the biggest drug stores in the US. And with the acquisition of Boots, it now runs one of the biggest drug stores in the UK as well.
The trouble WBA was having before COVID-19 was it was having a tough time managing its expansion after buying more than 1,500 Rite Aid (NYSE:RAD) stores and turning them into Walgreen’s location.
It’s tricky business given that both have locations in similar spots and RAD was having trouble making them profitable.
As WBA was sorting this out, COVID-19 hit. Now it has the new challenges of making money with all these new stores when few people are doing more than just grabbing their prescriptions.
Margins are getting hit even as revenue ticked up last quarter.
The stock is only off 26%, less than half most of the other companies on this list, but it has bigger problems than the current pandemic. And this added strain may be too much. And its 4.5% dividend may seem reasonable and attractive, but it still keeps your investment in the red.
Tapestry is a company that has marketed boutique fashion brands since 1941. Currently it has Coach, Kate Spade and Stuart Weitzman under its umbrella.
These are all aspirational brands for middle class and upper middle-class consumers. They are premium products usually sold to a core group of retail consumers in the US that in good times don’t have a problem paying a premium for the brands they want.
But when the economy goes South, these consumers are the first to pull back these luxury purchases and get more pragmatic. These are also the consumers with higher levels of consumer debt that have to start making harder choices with their credit cards.
None of this helps TPR’s business. Many similar brands are already getting cut to junk status at credit rating agencies. That makes financing during this time even more difficult.
The stock is off 68% and has a 12.2% dividend, which doesn’t help much now. And if it gets cut, that stock price will certainly drop even further. I’m seeing much more compelling opportunities now.
Ulta Beauty (ULTA)
Ulta Beauty has managed the front end of the crisis is good form. This big box beauty retailer has shut down all its stores and has boosted its distribution workers’ pay $2 an hour to fulfill online orders.
The bigger issue is the fact that ULTA has been on a growth binge. That usually happens when publicly traded companies start their national run. Investors are willing to investing in growth and not worry about the stability of the underlying business.
Although, ULTA has been killing it for a while now as it opened stores in new cities it was still growing revenues, earnings and same store sales. But that latter stat is certain to change now that all the stores are shuttered.
And the metrics for success will be significantly different. Now it’s about managing the debt and keeping operations in proportion to revenue. Without its growth engine, this growth stock’s strength is diminished. How much, we don’t know yet.
And there are already too many risks to shoulder in this market.
At the end of the day, retail has become a difficult business in which it’s difficult to deliver the earnings as well as operating margins I’m looking for. That was true even before the coronavirus outbreaks began.
Looking farther ahead, a key engine of our economy is going to be the extraordinary developments taking place in the world of wireless internet infrastructure.
The 5G Buildout Is an Incredible Opportunity for Investors Right Now
Within two years, most cell phones will be 5G enabled and be able to wirelessly handle television streaming. With 5G, we’ll have cable modem speeds on any device; no need to plug in. That’s a big deal for rural areas … the very same areas that are also key to President Donald Trump’s reelection. So, by pushing 5G over the goal line, Trump will deliver a big win for his base — and strike a blow against Chinese rivals like Huawei Technologies.
But, in the big picture, 5G is about much more than trade wars and faster downloads. Because 5G is 100 times faster than 4G, it’ll allow your internet devices to work in real time. That advancement is a game changer for tech companies.
With the 5G infrastructure market set to grow at an annual rate of 67% over the next 10 years, the entire market will go from $780 million to nearly $48 billion. This buildout is where I see opportunity with 5G stocks now.
Cable companies will do their best to fight back with fiber optics, but they can’t compete with the convenience of a smartphone, once it’s got ultra-fast 5G. That’s how my 5G infrastructure play will capture more market share from the broadband cable companies.
The stock I’m targeting is a favorite on Wall Street, and it has strong fundamentals, too — making it an A-rated “Strong Buy” in my Portfolio Grader system.
When you do, you’ll see how to claim a free copy of my new stock report, The Netflix of 5G, which has full details on this company — and what makes it such a great investment.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.