Don't Buy These Retail Stocks

• Email
• Share
• Print

The March retail comps released yesterday were pretty ghastly for the most part. Consumer spending seemed to slow to a crawl during March, as the housing downturn and credit crisis continue to pressure shoppers' spending habits. Still, I don't think investors ought to write off the entire retail industry just because of cyclical economic trends. But at the same time, even though many retailers' stock prices have been beaten down, I don't think investors should go shopping indiscriminately, assuming these stocks are bargains across the board.

With all the crazy moves retail stocks make -- sometimes on no news whatsoever -- I sometimes wonder whether investors and traders got a bulk shipment of antidepressants (or perhaps missed their doses). In contrast, we Fools are in this for the long term; we should try to ignore unreasonable stock machinations as much as possible, instead seeking great companies at reasonable prices. These days, I'm thinking that most turnaround stocks are a particularly tough sell.

The trouble with turnarounds
From my regular observations of the retail sphere, I was able to compile a list of some of the worst prospective buys among high-profile turnarounds. I believe that all of these companies have tarnished brands, fierce competition, an uncomfortably high level of debt given their situations, and/or an excellent chance of suffering greatly in the current consumer slowdown:

Company	1-Year Return	Debt/Capital	CAPS Rating (Out of 5)
Gap (NYSE: GPS)	(3.54%)	4.20%	*
Talbots (NYSE: TLB)	(48.80%)	46%	*
Borders (NYSE: BGP)	(67.80%)	54%	**
Blockbuster (NYSE: BBI)	(51%)	54%	*

*Sources: Yahoo! Finance and Motley Fool CAPS.

Gap's 18% comps drop yesterday is no temporary fluke. The company has been struggling to turn itself around for ages, trying to reignite sales and rejuvenate its brands, but its initiatives just don't seem to hold. Buyer, beware: Even though its stock price seems relatively stagnant at these levels, Gap often seems to suffer some form of irrational optimism.

Talbots is in the midst of a major turnaround, and it's trying to reconfigure its merchandise to escape the dowdy reputation it has inadvertently fostered. It also reported a massive loss last quarter, and it has a fair amount of debt. Hope seems to spring eternal among investors -- Talbots is up 85% in the past three months! -- but the company still has a lot to prove.

Borders Group is not just peddling books -- now it's also trying to peddle itself. It recently let loose with some uncomfortable news, including a potential liquidity crunch later this year. However, it was able to arrange financing with its major shareholder, Pershing Square Capital Management, with whom it subsequently negotiated even more favorable terms. Nonetheless, it faces high debt and stiff competition from counterpart Barnes & Noble (NYSE: BKS) and online powerhouse Amazon.com (Nasdaq: AMZN). Borders' significant challenges leave me deeply unconvinced that it's a compelling stock idea.

Blockbuster doesn't simply face competition from the likes of Netflix (Nasdaq: NFLX). It's also burdened with debt, a situation I find more ominous than ever in the current economic climate. I'm definitely less bearish on Blockbuster now that CEO Jim Keyes is on board, but I still don't think it's a buy right now.

However hard these companies have been hit, for however long, that's no guarantee that they've hit bottom yet. And with all the work they still need to do to recuperate, it doesn't make them bargains, either.

Community check
These are my picks for stocks to avoid, but I wanted to know what others might think. Judging by our Motley Fool CAPS community-intelligence database, it seems I'm not alone in bearing down bearishly on these companies. Three of these four "don't buy" stock ideas have one-star ratings in the CAPS community; Borders rates a marginally better two stars.

The market's recent slump has given investors many opportunities to get great stocks dirt-cheap. But while I understand the idea of investing in beaten-down, overly cheap turnaround companies that the market has shunned, such stocks can easily be value traps, rather than true values. Why take the chance, especially with consumers so incredibly fickle right now? Go for the gold, Fool, and beware the brass.