Retail stocks were among the hardest hit by the novel coronavirus. S&P Global Market Intelligence reports that U.S. company bankruptcies are on pace to eclipse a 10-year high. As of Aug. 9, the research firm is reporting that 424 companies have filed for bankruptcy. This includes iconic names such as, Brooks Brothers, Pier One (OTCMKTS:PIRRQ), Hertz (NYSE:HTZ), Neiman Marcus and J.C. Penney (OTCMKTS:JCPNQ).
Not surprisingly, the firm reports that 85% of the bankruptcies are in the consumer discretionary sector. That’s the sector that contains retail stocks. Traditional brick-and-mortar retailers were in dire straits prior to the outbreak of the novel coronavirus. But companies were forced to close their physical storefronts for weeks, and in some cases, months.
Some retailers had a strong e-commerce structure. However, for many cash-strapped companies an absence of revenue coming through the door is proving too large of a hurdle to overcome.
Talk of a second national lockdown may be dissipating. But it’s becoming clear that consumer spending may not be as robust as stimulus efforts are coming to an end.
And that means retailers that were counting on pent-up demand may not see the robust recovery that seemed a certainty just a few months ago. The rate of new jobless claims may be declining, but the idea of a V-shaped recovery is largely seen as a myth.
With that in mind, here are six retail stocks that are racing against the bankruptcy clock.
- Nordstrom (NYSE:JWN)
- Macy’s (NYSE:M)
- Gap (NYSE:GPS)
- AMC Entertainment (NYSE:AMC)
- GameStop (NYSE:GME)
- Rite Aid (NYSE:RAD)
Retail Stocks: Nordstrom (JWN)
Among retail stocks, investors should pay close attention to Nordstrom. The retailer is preparing to report quarterly earnings on Aug. 18. Nordstrom had a terrible earnings report in May, seeing net sales decrease by 40%. But investors were unfazed. JWN stock went up briefly, but it has since given up those gains.
Analysts will be closely watching to see if Nordstrom was able to see continued growth in its e-commerce segment. In the first quarter, e-commerce sales were up 5% to $1.1 billion. And the company needs it. In July, Nordstrom cut 6,000 jobs even though it had successfully opened 378 stores nationwide. That came on the heels of the company announcing in May that it was shutting 16 stores due to the Covid-19 pandemic.
Nordstrom had plans to use a significant amount of the $1.4 billion in cash on hand at the end of the first quarter for stock repurchases. While that may have served to keep the stock afloat, it doesn’t give investors too much hope for near-term growth, particularly since the company added an amount similar to that in secured debt and through drawing down on its revolver.
At first glance, Macy’s appears to be weathering the pandemic no worse than other retail stocks. M stock has climbed 63% from its low of $4.45 on April 2. However, the company is being battered by bad news which is dashing hopes for its recovery. And if consumer spending doesn’t return, it will take a miracle for Macy’s to avoid bankruptcy.
Macy’s has a larger retail footprint than Nordstrom. So if you take Nordstrom’s problems and magnify them, you arrive at Macy’s. The company delayed its earnings report previously scheduled for June 9 into July. I guess you could say it was worth the wait.
But the news wasn’t good. The retailer announced that it expects brick-and-mortar sales to fall 35% year-over-year. While the company is expecting some help from e-commerce sales, the overall picture shows a YOY decline of 20% to 25%.
And it doesn’t help when you can’t get out of your own way. Shortly after it announced its earnings, the company paid out $9 million in equity awards to six top executives. That was just days after announcing a near 25% reduction in its corporate staff. Tone-deaf moves like that typically don’t sit well with investors.
Retail Stocks: Gap (GPS)
GPS stock has been on a tear, rising over 175% from its April low. Some of that may be due to the announcement of a partnership with Kanye West and Yeezy, his fashion company. A new clothing line called Yeezy Gap will debut in the first half of 2021.
In the present, however, investors will be looking at the retail stock’s earnings call to see if it was getting any better on its cash burn rate. Despite announcing it would close 230 stores prior to the pandemic, the company was still struggling to pay rent. In fact, the San Francisco Chronicle reported that bankruptcy was likely. However, it also suggested a strong credit rating might help extend its window.
The biggest issue for Gap is that it made its name as a destination for teens. But while the teen demographic is alive and well, they’re not shopping at malls. And that is making Gap increasingly irrelevant. But that’s only one problem the company faces. The other is that the economy is likely headed into a recession. And that means less discretionary spending.
AMC Entertainment (AMC)
In July, AMC Entertainment made a restructuring deal to help it avoid bankruptcy. However, that may be just delaying the inevitable. Any investor taking a position in AMC stock has to consider when theaters reopen in a meaningful way. And by meaningful, I don’t just mean being open. While I enjoy going to the movies, I also have to admit it’s high on my “do I really have to do that?” list.
AMC operates approximately 8,200 screens in the United States and more than 2,900 internationally. While theaters outside the U.S. are opening, the U.S. market remains closed, and some analysts suggest they may not be able to safely reopen until 2021.
AMC is touting a plan to reopen next week, but who knows how that will go.
AMC recently struck a deal with Comcast’s (NASDAQ:CMCSA) Universal Studios that will allow the company to have three weekends of exclusive rights to some studio productions before they go to Comcast’s premium video-on-demand (PVOD) home distribution channels. While this will give AMC another potential revenue stream (it will get a cut of every PVOD release), that revenue will pale in comparison to what it gets from the box office.
AMC stock is up over 130% from its April low.
Retail Stocks: GameStop (GME)
This fall may well be the last stand for GameStop. With the introduction of new gaming consoles from both Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE), the company has an opportunity to become relevant again. The last time the companies released new Xbox and PlayStation consoles together was October 2013. GME stock doubled at that time.
But we weren’t in the middle of a global pandemic. And it remains to be seen if GameStop has the e-commerce chops to hang with other online buying options. In its most recent earnings report, the company did report its e-commerce division rose over 500% in the first quarter. The company did burn through a lot of its inventory right as it started to reopen its physical stores, but that is a tradeoff the company had no choice but to make.
GameStop CEO George Sherman said, “We are able to leverage our unique buy-sell-trade competitive advantage to supplement hardware demand from customers.”
Rite Aid (RAD)
The drugstore chain is benefiting from being a testing hub for the novel coronavirus. And although the company doesn’t necessarily make money off of the test itself (it is free in many locations), it does help the store get traffic.
And with health and wellness taking center stage for many companies, that’s a benefit the company needs. In its most recent earnings report, the company posted a net loss of $72.7 million.
While that number was an improvement from the $99.3 million loss it posted for the same quarter in 2019, it continues to show the problems that Rite Aid faces. The company also posted negative cash flow of $240 million and reported a quarterly cash burn of $200 million to fund day-to-day activities.
The continuing presence of the novel coronavirus, and the likelihood of increased testing should be enough to keep Rite Aid out of bankruptcy for the rest of 2020. But once the immediate threat recedes, it remains to be seen if the company’s constant attempts to reinvent itself will bear fruit.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.