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Nasdaq Climbs Despite Retail Pressure From Ross, Ulta

By Dan Caplinger – Jun 25, 2020 at 1:20PM

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Worries about surging COVID-19 case counts are hitting retailers harder than other stocks Thursday.

The stock market's resiliency has been surprising lately, especially given all the uncertainty related to the coronavirus pandemic. Even with a rise in the number of COVID-19 cases reported, the Nasdaq Composite (^IXIC) has been able to push to record highs recently. As of just before 1 p.m. EDT Thursday, the Nasdaq Composite was up about 0.5%, and the Nasdaq 100 rose by a similar amount.

The news hasn't been good for every sector, however. Retailers are more vulnerable than most companies to the impacts of possible future shutdowns, and that was one of the factors that pushed shares of Ross Stores (ROST 0.29%) and Ulta Beauty (ULTA -0.88%) down about 4% at midday on Thursday. Even though these two members of the Nasdaq 100 have taken steps to protect themselves from the full force of the pandemic, investors are still worried about what they're seeing elsewhere in the retail industry.

Ulta Beauty store location with orange awning, as seen from parking lot near dusk with partly cloudy sky above.

Image source: Ulta Beauty.

Bankruptcies a-plenty

Many retailers have had to resort to bankruptcy protection because of the financial pressures that COVID-19 closures had on their businesses. From department stores to specialty retailers, the loss of in-store customers was the final blow for many companies that had already faced significant challenges from e-commerce competition.

Earlier this week, it was GNC Holdings' (GNC) turn to go to bankruptcy court. The vitamin and supplements specialist sought Chapter 11 protection to help it restructure its debt load, and GNC hopes to close up to 1,200 of its store locations and seek a buyer for the remainder of its business. For now, GNC stores will remain in operation, but as with most other bankruptcies, it's once again likely that current GNC shareholders will get completely wiped out.

A tailwind for Ross Stores

Under more ordinary circumstances, challenging times would be a positive for Ross. The stock had recovered almost two-thirds of its coronavirus bear market losses by the end of May, as analysts anticipated that with an economic recession likely, discount retailers would have a natural advantage over their full-price counterparts.

However, it's important for Ross to be able to have shoppers visit its stores in order to make the most of that macroeconomic opportunity. Ross' store locations appeal to bargain hunters, and although the apparel and accessories retailer does have an online presence, it's tough to duplicate the experience online.

So far, Ross has reopened many of its locations through the phased approaches that states in which it operates are using. If those states have to go back to earlier phases and close retail stores again, it could hurt Ross, and that's what today's share-price drop seems to reflect.

More challenges for Ulta

Ulta's stock saw the same gains, but share prices have fallen back more sharply. Part of the problem that Ulta faces is that as a provider of beauty salon services, its stores fall into different categories for many states that are using phased approaches toward reopenings.

Ulta has made the best of the situation. It's offering curbside pickup to make sure that customers can get access to the products they need. It's also pushing hard to get people to use its online channel, whether to have purchases delivered straight to their homes or to use in-store pickup options. At the same time, though, the company is taking a critical look at whether its current store network footprint makes sense.

The prospect of further delays in fully reopening is especially worrisome for Ulta, as it could take away the hope of seeing sales levels return higher for several more months. Moreover, with the retailer having international aspirations, signs of the pandemic growing aren't favorable for its long-term strategic plan, either.

Investors can expect the entire retail industry to remain volatile as long as the COVID-19 crisis continues. That's true not just for weak companies that are filing for bankruptcy, but also for stronger players like Ulta and Ross that are also seeing the impact on their sales and profits.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ulta Beauty. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Ross Stores, Inc. Stock Quote
Ross Stores, Inc.
ROST
$84.27 (0.29%) $0.24
Ulta Beauty, Inc. Stock Quote
Ulta Beauty, Inc.
ULTA
$401.19 (-0.88%) $-3.57
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$10,737.51 (%)
GNC Holdings Stock Quote
GNC Holdings
GNC

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

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