Please ensure Javascript is enabled for purposes of website accessibility

Why These Apparel Retailer Stocks Plunged on Wednesday

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

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

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
390%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.