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Why These Apparel Retailer Stocks Plunged on Wednesday

By Daniel Miller - Apr 15, 2020 at 6:00PM

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Bleak economic news and a downgrade could be pulling these chains lower.

What happened

Shares of American Eagle Outfitters (AEO 3.55%), L Brands (BBWI 3.56%), and Abercrombie & Fitch (ANF 1.22%), well-known apparel retailers, all dropped sharply during trading Wednesday as new economic data looked bleak. American Eagle and L Brands both ended the day down more than 10%, while Abercrombie & Fitch was off 8.5%

So what

Stocks declined Wednesday in part because of March retail sales, which plunged 8.7%, the worst monthly decline on record. It was far worse than February's revised 0.4% drop as consumer spending plunged, events and entertainment ground to a halt, and millions lost their jobs. Furthermore, U.S. manufacturing output dropped by the most in over 74 years as COVID-19 sent shock waves through supply chains and manufacturing.

The market is trying to find balance as investors grasp the reality that while we may be nearing a peak in daily deaths and new cases, we definitely have yet to see the worst of the economic fallout and its impact on companies.

Clothing on a retail rack.

Image source: Getty Images.

Beyond the abysmal economic figures dragging stocks lower, American Eagle was also hit with a downgrade from Loop Capital. Its analysts said that COVID-19 has caused "unprecedented business disruption," and that mall traffic is likely to "remain very weak." Loop Capital halved American Eagle's price target from $14 to $7 per share. The company is doing what it can to conserve cash by slashing capital expenditures, suspending its buyback program, and deferring its first-quarter dividend payment.

Other retailers share a similar playbook during this time of uncertainty: Abercrombie & Fitch intends to borrow $210 million from its revolving credit facility and is working with vendors, lenders, and landlords to save cash.

For L Brands, the economic turmoil comes at a particularly bad time. It was slated to sell a 55% stake in its Victoria's Secret business to private equity firm Sycamore Partners, but that deal could be up in the air with retail being hit as hard as it is currently, especially considering that the business would need a major turnaround strategy even in normal economic conditions.

Now what

Stock market volatility is simply going to be the near-term normal as investors pivot between optimism that the economy will bounce back quickly, and the realization that we have yet to see how badly COVID-19 will hurt businesses across the globe.

It's important for investors to double down on research before investing, especially if they're considering hard-hit sectors such as consumer discretionary. Broader markets will eventually rebound, as history has proved after every significant development, but not all companies have the liquidity to survive this plunge in retail spending. American Eagle, L Brands, and Abercrombie & Fitch have all taken steps to slash spending and save cash, but they certainly face a gloomy near term and plenty of uncertainty.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

American Eagle Outfitters, Inc. Stock Quote
American Eagle Outfitters, Inc.
$12.38 (3.55%) $0.42
Bath & Body Works, Inc. Stock Quote
Bath & Body Works, Inc.
$38.67 (3.56%) $1.33
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
$19.05 (1.22%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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