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Santa may have gone back to the North Pole until next year, but I'm always making lists and checking them twice to find out which companies have been naughty and nice. With our calendars ready to roll over to the new year, it's time we take a closer look at the retail sector.
Whether we go headfirst, kicking and screaming, over the fiscal cliff or a deal gets done, I want to look at three retailers you may want to avoid in 2013 because they could be in for a rough year. This is a follow-up to my earlier article that looked at three retailers you can buy without fear in 2013.
Michael Kors (NYSE: KORS )
Investors have given Michael Kors an incredible valuation premium, and with good reason -- same-store sales have increased by at least 30% in each quarter since it went public. Michael Kors has relied on strong demand for branded merchandise as well as a rapid expansion of bricks-and-mortar stores to boost its international expansion. While this is incredibly impressive, I feel the same-store comparisons the company will face in 2013 will be too large to overcome.
This is a simple case of "Let's see you do it again!" Even with rapid growth in Europe and the U.S., I have to assume that austerity measures around the world are going to curtail consumer spending. There's nothing I see that makes Michael Kors' brands a "must-have" versus any other premium brands, leading me to believe that its premium of 24 times forward earnings simply isn't deserved.
Gap (NYSE: GPS )
Gap CEO Glenn Murphy was a hero to investors in 2012, but that may change in 2013 as a weaker spending environment exposes what I suspect are inventory issues galore with the company. Just as Gap dealt with some very easy same-store sales comparisons versus last year, it's going to be dealing with very difficult comparisons in 2013. Where Gap found strength in the North American market in 2012 and a little solace in a struggling European market, next year it'll struggle to generate growth in an increasingly tighter spending environment worldwide.
Specifically, Gap's Glenn Murphy attributed his company's experimentation with new designs in its stores as a reason the company performed so well this year. This same experimentation could also be precisely what gets the company's focus off the brands that are working and creates an inventory nightmare. In addition, one of my selections for top retail pick, American Eagle Outfitters (NYSE: AEO ) continues to steal the teen audience from Gap's Old Navy with better styling and comparable prices. I expect Gap to revert back to its old ways in 2013.
Pacific Sunwear (NASDAQOTH: PSUNQ )
Teen-based retailer Pacific Sunwear has been taking the appropriate steps necessary to turn around its ailing business: closing underperforming stores, mixing up its merchandise, and cutting costs where it can. Unfortunately, PacSun has been working on this turnaround for the better part of four years, and it's not likely to turn itself around in 2013 if consumer spending dips further.
PacSun hasn't turned a profit since 2007, and its margins have been in serious decline since 2006 largely due to it being out of touch with its consumer base. Competition among teen retailers is fierce, and PacSun has been painfully slow to adapt. Zumiez (NASDAQ: ZUMZ ) , an action-sports apparel company, has been suffering from similar issues recently; however, it's acting quickly and relying on its customer service and omni-channel retailing to pull its operations out of their current funk. I'm not certain PacSun can close underperforming stores quickly enough.
3 ways to avoid another retail fail
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.