10 Retailers That Need a Big Holiday Season to Survive

10 Retailers That Need a Big Holiday Season to Survive
The pandemic has battered popular retail stocks
While few sectors of the stock market have been immune to the negative financial impact of the coronavirus, certain retail stocks have had to battle the severest fallout from the pandemic. In particular, companies that traditionally maintained a heavy reliance on brick-and-mortar sales before the pandemic are struggling to keep up with changing consumer trends and a surge in digital demand.
As a second (or third) wave of the coronavirus hits countries and consumers around the globe, more than a few big names in retail are wondering if they can salvage enough sales from the holiday season to pull their waning balance sheets back up from the depths. The following 10 retailers may manage to stagger into next year in one piece, but without a big and booming holiday season of sales, 2021 could mark the beginning of the end for these household names.
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1. Gap
Although Gap (NYSE: GPS) reported online sales up 13% year over year in the first quarter, and a 95% surge in digital sales in the second quarter, its online presence wasn’t enough to turn the company’s revenue numbers positive. During the first and second quarters of 2020, Gap’s net sales declined by 43% and 18%, respectively, compared with the same periods in 2019. The company’s cash situation isn’t good, either -- it reported a negative $295 million in cash flow in its second-quarter earnings release.
In October, management rolled out the company’s Power Plan 2023 strategy, which aims “to deliver consistent sales growth, margin expansion and strong operating cash flow” and “reach almost 80% of the addressable market in the U.S. across all ages, sizes and demographics” by revitalizing brands including Athleta and Old Navy.
Although a targeted plan for long-term growth is a hopeful sign, it doesn’t look like this road map for Gap’s future is likely to translate into any substantial gains for investors in the next few years. And, if the company can’t manage to close out the year with a bang, Gap may sink further into the mire of unprofitability in which it is currently entrenched.
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2. L Brands
L Brands (NYSE: LB) holds three major household names in its stable of subsidiaries: Victoria’s Secret, Bath & Body Works, and PINK. Any way you slice it, L Brands is in a tough financial spot. The company reported a year-over-year net sales decline of 37% in the first quarter, while second-quarter sales were down 20% compared with the same stretch last year. The company’s losses per share ($0.18) also exceeded its earnings per share ($0.14) during the second quarter.
L Brands is working diligently to reduce its expenditures and stop its financial hemorrhaging. The company is closing 250 Victoria’s Secret locations this year. In July, management said that it "expects to deliver approximately $400 million in annualized cost reductions through its profit improvement plan” for the brand and other targeted initiatives. The pandemic wasn’t the start of L Brands’ troubles. Last year, the company reported $366.4 million in net losses, and its operating income of $258.4 million was just a fraction of the $1.2 billion it reported in 2018.
L Brands appears to be staving off bankruptcy for the time being, but there are still too many red flags to make this stock a good buy right now.
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3. Macy’s
It’s been a dark year for venerable department store Macy’s (NYSE: M). Shares of the company have plummeted by 51% compared with their January trading price. Macy’s is closing more than 100 stores over the next few years in an effort to reduce its expenditures, but these actions may be too little, too late.
The company was struggling with profitability before the pandemic hit. Its sales declined by 2% in 2019 from 2018. And while it reported net sales of $24.6 billion in 2019, its net income was only $564 million. It seems that the pandemic has just been the proverbial nail in the coffin.
Macy’s reported that digital sales were up 53% year over year during the second quarter of 2020, but comparable sales declined 35%. A triumphant holiday season could help to turn things around for the company, but even in the best-case scenario, it’s more likely than not that the financial impact of the pandemic will continue to follow it for years to come.
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4. J.C. Penney
J.C. Penney (OTC: JCPN.Q) wasn’t in a good place before the pandemic. Last year, the company reported an 8.1% decline in net sales and a 7.7% drop in comparable-store sales. It closed 2019 with just $386 million in cash and cash equivalents compared with its long-term debt load of $3.6 billion. Unfortunately, J.C. Penney was one of the first to buckle under the weight of retail closures during the pandemic, with management announcing on May 15 that the company was filing for Chapter 11 bankruptcy protection.
It wasn’t long before the company entered an agreement to sell itself to Brookfield Asset Management and Simon Property Group, a rescue deal that was approved by a U.S bankruptcy court on Nov. 9. The transaction will conclude later this month, allowing J.C. Penney to exit bankruptcy before the holiday season gets in gear, but stockholders will lose any stake in the company. Whether or not the buyout will breathe life back into the retailer’s operations remains to be seen.
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5. Nordstrom
Shares of Nordstrom (NYSE: JWN) are close to scraping the bottom after seeing a 52% decline from January. With the company’s stores being closed for more than half of the second quarter, the company’s net sales for that period represented a 53% decline from the same stretch in 2019. Nordstrom did manage to grow its operating cash flow to over $185 million during the second quarter, but it reported $255 million in net losses with gross profits down 35% year over year.
The company announced on Oct. 15 that it was launching Nordstrom Rack fulfillment options, allowing customers to pick up their orders at retail locations. Management is hoping this initiative will expand the company’s consumer outreach in light of ongoing coronavirus-related restrictions. A robust holiday season would certainly be the boost that Nordstrom needs, but investors who are thinking about buying shares of this stock would do well to sit tight at the moment.
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6. Ross Stores
While shares of Ross Stores (NASDAQ: ROST) are down year to date, the stock still seems woefully overvalued at 74 times trailing earnings. The company’s sales for the first six months of 2020 dropped 42% compared with the first half of 2019. Ross Stores also accumulated $284 million in net losses during the first six months of 2020, while second-quarter sales alone represented a year-over-year decline of $1.3 billion.
The company opened 39 new locations in 17 states in the month of October, which could be a hopeful sign for its future profitability. Right now, though, this stock doesn’t fit the bill of an attractive coronavirus buy.
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7. Burlington Stores
Burlington Stores (NYSE: BURL) is another well-known retailer that has faced immense financial strain due to store closures earlier in the year. The company saw a 45% sales decrease during the first half of 2020 compared with the same period in 2019. Second-quarter sales for reopened stores were down 14% versus the sales generated by these stores during the same time frame last year.
With plenty of bumps in the road ahead before Burlington Stores can hope to regain a sense of prepandemic normalcy on its balance sheet, this retailer may be best left out of your end-of-year stock buy list.
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8. GameStop
GameStop’s (NYSE: GME) traditional business model hasn’t fared well in the pandemic economy, but other headwinds have threatened the company’s growth prospects. Mall-based and retail store operations such as GameStop’s have long been in peril with the ever-increasing dominance of the e-commerce market. Last year, the company reported total global comparable-store sales down by nearly 20%.
While GameStop reported global e-commerce sales up by 800% year over year in the second quarter, its sales for the three-month period still represented a 27% year-over-year decline. The days GameStop stores were in operation also plunged by 13% year over year because of pandemic restrictions.
Even with the considerable spike in its e-commerce revenue during the pandemic, GameStop has its fair share of mountains to climb to achieve profitability in the long term. The upcoming holiday season could easily be a make-or-break earnings period for the struggling consumer electronics retailer.
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9. Chico’s FAS
Chico’s FAS (NYSE: CHS) reported sales down 45.9% year over year in the first quarter. Chico’s managed to narrow its sales losses in the second quarter with digital transactions, but sales still dropped 39.8% compared with the same period in 2019. Its first- and second-quarter net losses were equally alarming at $178.3 million and $46.8 million, respectively.
In addition to temporary store closures, management also attributed the company’s bleeding balance sheet to the “impact of 74 net permanent store closures since last year's second quarter.” Chico’s already filed for bankruptcy protection in Canada earlier this year. Without a bustling holiday season, the company may be faced with some difficult decisions about its future in 2021.
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10. Abercrombie & Fitch
Abercrombie & Fitch (NYSE: ANF) fell victim to waning profits long before the pandemic began. In 2018, the company reported a very slight 3% year-over-year net sales increase, while net sales were up by a slim 1% in 2019 compared with the year before.
In Abercrombie & Fitch’s most recent earnings release for the second quarter, it reported net sales down 17% year over year, even though digital sales surged by 56%. The company has a considerable cash position to fall back on ($766.7 million at the close of Q2), but its $1.6 billion in long-term liabilities could weigh heavily on its balance sheet in upcoming quarters.
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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.
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Investing in retail stocks during the pandemic
With rapid advancements being made in the race to get a safe and effective COVID-19 vaccine to market, a return to normalcy could lie ahead of us in 2021. However, some retail stocks may not survive the wait.
Most of the top winners in retail this year have been companies with much more diversified business models that aren’t solely apparel focused -- and that already had thriving e-commerce divisions. A few top examples include Amazon and Walmart. If you’re thinking about scooping up some retail stocks before year’s end, these companies pose much better buys for a long-term investor’s portfolio.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rachel Warren has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends GameStop and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.
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