The retail sector has been a treacherous one over the past few years, due to heavy competition from e-tailers and cutthroat competition among brick-and-mortar players. Therefore, it's easy for investors to step on landmines across the sector if they're not careful. Today, we'll examine two retail stocks that could cause you to lose a lot of money -- Macy's (NYSE:M) and Under Armour (NYSE:UAA) (NYSE:UA).
Shares of Macy's crashed nearly 30% over the past month due to its disappointing holiday sales and reduced profit forecasts for the year. That decline reduced the company's price-earnings (P/E) ratio to 14 (compared to the industry average of 36), its price-sales (P/S) ratio to 0.4, and boosted its forward yield to nearly 5%. That low valuation and high dividend attracted some contrarian investors, but I believe that it won't recover anytime soon for two reasons.
First, Macy's revenue has fallen annually for seven straight quarters. Its plans to close 100 stores and cut 10,000 jobs might tighten up its margins, but that won't drive more customers back to its stores, especially when Amazon's 2016 holiday sales hit a record high. Macy's online business is growing by the double digits, but it only accounts for about a fifth of its top line. Moreover, Macy's is merely following the path of Sears Holdings (OTC:SHLDQ) and J.C. Penney -- closing stores couldn't save those dying mall anchors, and it probably won't save Macy's.
Second, some investors believe that Macy's can squeeze value out of its real estate by spinning off its valuable properties into an REIT (real estate investment trust) and leasing its stores from the new company. But we've already seen Sears do the exact same thing with its spin-off of Seritage Growth Properties. Sears got a brief bottom line boost from the spin-off, but those gains didn't last long. Therefore, I believe that Macy's -- once a standout performer among department stores -- could be boarding the same sinking boat as Sears and J.C. Penney.
Under Armour went through several confusing changes last year. Last March, it approved new non-voting Class C shares as a one-for-one dividend to Class A (regular shareholders) and Class B (CEO Kevin Plank's) shares. In June, it paid a "special" $59 million dividend to appease Class C shareholders who claimed that the move diluted existing shares to help Plank maintain voting control.
Investors then complained about the growing disparity between the prices of the two share classes, which prompted the company to rename its Class A shares from UA to UAA and Class C shares from UA.C to UA in December. Despite all those changes, both classes performed poorly since last March, with UA dropping 35% and UAA plunging 63%. Those declines were caused by its slowing sales growth, the bankruptcy of Sports Authority, key executive departures, and declining margins.
Under Armour's sales rose 22% annually last quarter, but that represented its slowest growth rate in six years. Its apparel revenue rose 18% to $1.02 billion, footwear revenue climbed 42% to $279 million, and its total net income improved 28% to $128.2 million. Those numbers look solid, but the company's growing dependence on footwear is troubling because it's a commoditized market dominated by heavy-hitting players like Nike and Adidas.
Analysts expect Under Armour's revenue and earnings to respectively rise 24% and 13% this year, but those growth figures don't really justify its lofty P/E of 45 -- which is much higher than the industry average of 26. That's why I personally wouldn't be surprised to see Under Armour get cut in half during a market downturn.
The bottom line
I realize that plenty of value investors think that Macy's turnaround plan will work, and that some growth investors are still willing to pay a premium for Under Armour. But I believe that Macy's will struggle to avoid J.C. Penney's fate, and that Under Armour will find it tough to go toe-to-toe with Nike in the high-end footwear market. Therefore, investors who buy these stocks today could lose a lot of money in the near future.