Being "Amazoned" means that Amazon.com's (NASDAQ:AMZN) ever-expanding e-commerce ecosystem is steamrolling a company. That list is growing by the day, with sluggish brick-and-mortar traffic forcing companies to shutter stores and make dramatic strategic shifts to remain relevant.
Many "Amazoned" retailers might look like contrarian buys, with low valuations and high dividends, but investors should exercise caution with these hated stocks. Let's examine three Amazoned retailers I'd definitely avoid -- Foot Locker (NYSE:FL), Kroger (NYSE:KR), and Macy's (NYSE:M).
Shares of Foot Locker plunged 28% on Aug. 18, after the footwear and apparel retailer reported weak second-quarter numbers that missed expectations. Revenue fell 4.5% annually to $1.7 billion, missing estimates by $100 million. Comparable-store sales dropped 6%, and its non-GAAP earnings fell 34% to $0.62 per share -- which was $0.28 below expectations.
CEO Richard Johnson blamed those declines on a "limited availability of innovative new products in the market" and dismissed the notion that having companies such as Nike directly sell their products on Amazon could disrupt its business. But in addition to Amazon, other leading footwear makers, including Under Armour and Adidas, are also investing heavily in direct-to-consumer sales via their websites and apps.
Cowen & Company analyst John Kernan called those websites a "contagion" for Foot Locker and claimed that its comps and margins would continue declining as the footwear and athletic-apparel market "continues to shift to a variety of channels and emerging brands." Therefore, Foot Locker looks cheap at seven times earnings with a forward dividend yield of 2.6% -- but it could face much more pain in the coming year.
Amazon's announcement that it would buy Whole Foods Market (NASDAQ:WFM) torpedoed Kroger's stock in June, since Amazon could use the grocer's nationwide network of stores to beef up its AmazonFresh and Prime Pantry services. But Kroger was already struggling before that bombshell hit, because of tough competition from rival supermarkets, dollar stores, warehouse clubs, and superstores such as Wal-Mart (NYSE:WMT).
Kroger's revenue rose 5% to $36.3 billion last quarter, which beat estimates by $520 million. But its adjusted EPS also fell 18% to $0.58, which merely matched estimates. Kroger then lowered its full-year adjusted EPS guidance to a 3%-6% decline, versus its prior forecast for 4%-6% growth.
CEO Rodney McMullen claims that Kroger is "lowering costs to reinvest in ways that provide the right value" to its customers -- but it faces a tough uphill battle. Whereas Wal-Mart invested heavily in its e-commerce and online pickup features to remain relevant against Amazon, Kroger hasn't shown investors any meaningful ways, beyond online pickup and analytics tools, to counter its e-commerce and superstore challengers. Therefore, Kroger seems cheap at 14 times earnings with a forward yield of 2.2%, but I remain bearish on its long-term prospects.
Macy's has posted 10 straight quarters of annual revenue declines. Slumping mall traffic crippled its anchor stores, its stores remain oversized and filled with excess inventory, and most of its products can be purchased online from Amazon.
Macy's is resorting to big discounts to clear out the inventory at its namesake stores and Bloomingdale's, but those moves aren't boosting its top-line growth. Instead, they're arguably tarnishing its reputation and making it look like an off-price retailer rather than a mid-range department store.
Like Kroger, Macy's hasn't taken aggressive steps to counter Amazon and the paradigm shifts across the retail sector. It offers discounts on in-store pickups, but plenty of other brick-and-mortar retailers also do so.
The turnaround strategy at Macy's mostly consists of closing stores, selling some real estate to boost its cash flow, and leasing back some locations. That strategy sounds a lot like Sears Holdings' failed "turnaround" plan. Analysts expect revenue at Macy's to fall 4% this year, and for its earnings -- boosted by store closings and real estate sales -- to rise 9%. However, both its revenue and earnings are expected to fall next year. Macy has a low P/E of 11 and high forward yield of 7.5%, but the potential rewards just don't outweigh the risks.
The key takeaways
There are still solid stocks to buy in the retail sector. But Foot Locker, Kroger, and Macy's just don't qualify as viable investments. These three stocks all posted steep double-digit price declines this year, and they could tumble a lot more if they don't aggressively change their core businesses.
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of Whole Foods Market. The Motley Fool has a disclosure policy.
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