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4 Retail Laggards: Should You Shop Elsewhere?

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The National Retail Federation (NRF) said that retail in the months of November and December rose 3.8% year over year, which was better than last year's 3.5% mark. Yet, with many of the retailers that have reported holiday sales, we have seen a common theme of weakness, or results that fell way below expectations. Therefore, here are four retailers which appear to be trending in the wrong direction...and that you may want to avoid.

Spend your dollar elsewhere
After a rather impressive five-year period of growth, Family Dollar Stores (NYSE: FDO  ) is apparently running out of steam.

On Jan. 9, the company reported fiscal first-quarter earnings, which showed year-over-year revenue growth of 3.2%. Clearly, while 3.2% is slightly below the NRF's growth rate, it's still decent performance.

However, a closer look reveals a 2.8% decline in the company's comparable-store sales, which means the company actually saw lower sales at its existing stores. And while Family Dollar blames this performance on several decisions, such as stocking the wrong electronic devices and not pricing goods low enough, a decline of this level shows without a doubt that consumers are taking their business elsewhere, especially considering the overall growth in the sector.

Not quite the holiday rush
With two new game consoles, PlayStation 4 and Xbox One, being released for the first time in seven years, all signs pointed toward gaming merchandise being the big winner of the holiday season. GameStop (NYSE: GME  ) , a company that directly benefits from increased demand in games, was a company that many picked to reap the benefits.

Instead, the company reported comparable-store sales rose just 7.1% in the U.S., and this coming after millions of unit sales and new video game releases. Needless to say, this was very disappointing, as it was being compared to a year with no big-name releases.

When you combine this with the online-playing capabilities of new devices, it leads many to believe that consumers are simply no longer buying physical games with the same intensity as in years prior. Now, with much of the post-PS4/Xbox One rush behind us, it's really hard to find a reason to be bullish on GameStop's future, especially considering its weak performance.

The next JCP?
Sears Holdings (NASDAQ: SHLD  ) is a massive retailer with more than $37 billion in annual sales. Thus, the company's performance has typically been used as a way to gauge retail strength and has historically performed as well as the overall sector.

However, during the holiday season, the company's same-store sales declined a mind-boggling 7.4%, which is a trend that peer J.C. Penney has experienced during its epic fall. Moreover, what's really eye catching about Sears' fundamental performance is that weak traffic wasn't a result of discounting.

However, Sears states that it continued its promotional programs and marketing expenditures through the holiday season, yet still the performance was dismal.

As an investor, you have to think that Sears' performance simply means that consumers just aren't coming in the doors, which definitely carries the same tune that we've seen with J.C. Penney. Hence, it'd be tough to invest in the company right now.

The growth has fallen!
Lululemon Athletica (NASDAQ: LULU  ) has been in a downhill slope for the better part of a year, but many analysts and investors had thought it was possible that Lululemon would regain its traction in the fourth quarter. Well, it looks as if those optimists will have to wait a little longer because the company did nothing but highlight additional problems.

For the quarter, Lululemon estimates that its comparable sales will be in the negative low single digits. This marks the first time that Lululemon has produced negative comp sales but really shows how fast this company has fallen.

For example, in its third quarter, comp sales grew 5% and in the second quarter grew 8%. If we rewind back to 2012's fourth-quarter performance, then we'd see comp growth of 10%. Therefore, this is a company that's encountering major problems, and with its leader, founder, and visionary no longer at the company, I'd be hard-pressed to find a reason to buy.

Which is most alarming?
While the holiday earnings of these four companies are equally disturbing and horrible, I'd have to say GameStop is the most alarming.

There were many who expected Sears to struggle; Family Dollar is not what anyone would call a premier retailer with high expectations; and Lululemon is under new leadership. Hence, these facts lessen the degree of disappointment associated with weak fundamental performance.

But with GameStop there really aren't any excuses. This was the one quarter where GameStop should have crushed all expectations and thrived! When the PS4 and Xbox One were released, consumers were wrapped around Best Buy stores to purchase one, and those same consumers need games.

Therefore, the poor performance doesn't make sense, and the only logical conclusion is that more consumers are buying games online or storing downloaded games on their systems. If so, this represents a paradigm shift where GameStop could become near irrelevant, which is what makes its holiday performance the most alarming thus far.

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  • Report this Comment On January 21, 2014, at 5:04 PM, Hfish1212 wrote:

    Hard to be bullish on Game Stop at this price point? Really?

    I just bought a PS4 and played the freebies for awhile so holding off till I see a title I like. Otherwise, no, I am not buying a virtual disk, nothing but the real things for me! I guess you're not a gamestop buyer, just another bean counter otherwise you'd know how awesome GS is for being able to sell back games and buying new ones. Once there are more games out for the PS4 and X1 it will be back to business as usual for the retailer. These systems just came out so there is no reason to count disks out for a long long time. That is unless you like being chicken little?

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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