2020 was a tough year for retail stores. The coronavirus pandemic resulted in lockdowns and closures, and accelerated the move to online shopping. A large number of retailers, including iconic chains like Pier 1 Imports, went bankrupt. Some retail stocks posted significant gains in 2020, but they may not be in the same position in 2021.
In fact, some retail stocks are far too close to failing. The companies on this list might fool you at a glance. Some have seen their share post impressive gains over the past year. But the best of the bunch earns a dismal ‘D’ rating in Portfolio Grader:
- AutoZone (NYSE:AZO)
- Burlington Stores (NYSE:BURL)
- CVS (NYSE:CVS)
- Home Depot (NYSE:HD)
- O’Reilly Automotive (NASDAQ:ORLY)
- Ross Stores (NASDAQ:ROST)
- TJX Companies (NYSE:TJX)
If you’re looking for growth stocks for your portfolio, I have many suggestions. Here’s a list of triple-A-rated stocks, for example. And there are some retail stocks that are well positioned for growth, but you’ll note the companies are heavily weighted toward e-commerce players. The retail stocks on this particular list are risky, for a variety of reasons that I’ll go into.
Retail Stocks to Avoid: AutoZone (AZO)
Founded in 1979, AutoZone is the largest U.S. retailer of aftermarket automotive parts and accessories. Over the past five years, AZO stock has returned gains of 65%. That’s due in part to the fact that Americans are holding onto their cars longer than ever, which means more parts and maintenance items are required. But there are dark clouds on the horizon that threaten this retail stock.
There’s the omnipresent risk of Amazon (NASDAQ:AMZN). The e-commerce giant may not expand into car parts, but it certainly has no issue competing against AutoZone by selling automotive accessories.
The real danger for AutoZone lies in demographics. Millennials and Gen Z are showing far less interest in owning a car than older generations. Instead, they’re happy to use ride-share services. That’s a problem for car manufacturers, but fewer cars on the road also means fewer replacement parts required.
In addition, the popularity of electric cars is on the rise. One of the selling points of EVs is lower maintenance costs. They have fewer moving parts than gas-powered cars, and don’t require engine oil. That’s more bad news for a retailer like AutoZone.
After nearly 20 years in growth mode, AZO stock has plateaued over the past two years. The future doesn’t look promising given the headwinds this company faces.
Burlington Stores (BURL)
With the pandemic in 2020, retail stores were closed for lockdowns. After re-opening, many locations faced limitations on operating hours and the number of customers in a store.
That drove many brick-and-mortar retailers to scramble to create a website in order to survive. With online shopping receiving what is expected to be a permanent boost from the pandemic, having a strong e-commerce presence is seen as being a key to survival for retailers.
That makes Burlington Stores’ 2020 move a head-scratcher. The operator of discount clothing stores announced in March that it was shutting down its e-commerce operations. The company ditched online sales so it could focus on bargain shoppers. The company also announced plans to open up additional outlets.
The move paid off in the short term. BURL stock is up 132% over the past 12 months.
However, abandoning online shopping is going to hurt this retail stock in the long term. Adding to the risk, Burlington Stores’ early attempt at e-commerce fell flat. Online only accounted for 0.5% of the retailer’s sales before it was shut down. That does not bode well for the company’s odds for success when the growing consumer preference for online shopping forces it to attempt a pivot back to e-commerce.
CVS stock has put together 12-month growth of 44%, and that may fool you into thinking this is a solid, long-term growth retail stock. It’s not. Prior to 2020, CVS shares had been on a roller coaster, but trending down for the past five years.
The largest retail pharmacy chain in the U.S. has faced a raft of issues including massive debt needed to fund the $69 billion purchase of Aetna insurance in 2018, expansion into HealthHub healthcare services stores, and even investigations over prescription errors.
Competition from other pharmacy chains is fierce. However, the worst is yet to come. Amazon launched Amazon Pharmacy delivery service for prescription medications last November. Amazon’s pharmacy ambitions are a huge threat. The market recognizes that — CVS stock dropped 8.6% on the day Amazon made the announcement.
Home Depot (HD)
On the surface, these seem like great times for Home Depot. When people were in lockdown during the pandemic, many of them turned to home improvement. That made Home Depot a star among retail stocks, with growth of 71% over the past 12 months.
However, look more closely and you see that HD stock plateaued last August. It has had its ups and downs, but it has been pretty much flat ever since. That led to downgrades for home improvement stocks last fall, including Home Depot.
The concern remains that homeowners’ burst of spending last spring and summer may result in a period of slower sales for Home Depot in the future. As the U.S. eases out of the pandemic, there’s a possibility consumers will stop spending on their homes, and instead use their cash for dinners out, movie nights and vacations.
In addition, the risk remains that the U.S. could fall back into recession in 2021. If that happens, big-ticket expenditures like home renovation projects would be put on hold.
O’Reilly Automotive (ORLY)
Count O’Reilly Automotive among the retail stocks that posted big gains in 2020 — at least up until last August or so. And count it among the companies like AutoZone that are at risk of being beaten down by changing demographics.
The popularity of ride-shares over car ownership among younger generations. The growth in electric car sales over traditional gasoline cars. Even the likelihood of post-pandemic remote working becoming a popular option. That would reduce commuting, in turn reducing vehicle wear and tear.
Each of these trends cuts down on the demand for auto parts, as well as consumables like engine oil. ORLY stock was already facing analyst downgrades going into 2020. Going forward, it’s facing more headwinds. This time, trends like the surge in electric car ownership are long-term and they’re only going to gain momentum.
These factors are going to increasingly weigh on O’Reilly Automotive’s sales and ultimately on ORLY stock.
Ross Stores (ROST)
The pandemic was not kind to department stores. Ross Stores, with its Ross Dress For Less discount department stores, had been performing well. However, rummaging for bargains at one of the company’s 1,859 stores became significantly less popular during the pandemic.
In its Q2 2020 earnings, the company reported revenue had dropped precipitously — from $4 billion in Q2 2019 to just $2.7 billion. However, that wasn’t enough to prevent ROST stock from posting a gain of 90% over the past 12 months.
The big problem Ross Stores faces going forward is its complete lack of an e-commerce presence. That makes sense in that it would be extremely difficult to reproduce the “Ross Dress For Less” experience online. Individual stores had different stock, and inventory was constantly changing based on products the company was able to snap up at a discount from other retailers.
Willfully ignoring e-commerce is going to lead to a painful reckoning for Ross Stores. Online shopping was already on the rise, but the pandemic gave it a huge boost. In 2020, online spending by American consumers was up 44% compared to 2019. Yes, shoppers will return to stores, but their online shopping habit is not going to go away. It will continue to grow — with fashion and accessories leading the way.
Unless something changes, there will come a day when another online retailer will be selling discounted clothing snapped up at the closing of a Ross Dress For Less store.
Massachusetts-based TJX is another discount department store company. It owns popular chains like TJ Maxx, Marshalls and HomeGoods.
TJX suffers from many of the same challenges as Ross Stores. The company was forced to shutter locations during the pandemic. And the “bargain hunter” nature of its business — which involves buying up inventory from distressed retailers — makes e-commerce challenging.
TJX did at least have an e-commerce presence, but it wasn’t a big performer. The company actually shut down online sales last March when its stores were forced to close down.
Retail analysts have pointed out that small and crowded TJX stores are among the hardest to socially distance in. That will be a challenge going forward if there’s a lingering nervousness among consumers about crowding.
TJX is working toward strengthening its e-commerce presence, including plans to launch a HomeGoods online shopping site. However, it’s a race against time. It’s estimated that e-commerce currently accounts for just 2% of the company’s revenue. Ramping up the online capability is an expensive and costly proposition, and there are both technical and distribution challenges.
Once that HomeGoods site is online — something TJX is counting on for future growth — it will run smack into established competitors like Amazon.
In January, TJX stock hit all-time highs on anticipation that the vaccines would mean a return to normalcy. If that new normal doesn’t include going shoulder-to-shoulder with other bargain hunters at the discount racks, the company is going to be in trouble.
On the date of publication, Louis Navellier had a long position in AMZN. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.