Retail stocks have been some of the wildest movers in this strange year. 2020 has been a very different and difficult year — as consumers, as a society and as investors.
Some parts of the retail sector saw an instance boost, as consumers flooded big-box stores and grocery chains. With restaurants closed, many were forced to make all of their meals at home. Lockdowns created a strange world for everyone across the globe.
For certain companies, this resulted in a boon for its business. However, other retailers were not so lucky. For some, it was enough to force them into bankruptcy. For others, it obliterated their stock prices, which promptly went on to rally hundreds of percent from the lows.
For a group that is generally pretty mild from a stock-performance perspective, this year has been a definite outlier. Now it becomes a task of weeding out the winners from the losers. That comes amid the sector’s best performing quarter, as the holidays approach.
Here are seven retail stocks that may receive coal this year:
Wayfair
Retail Stocks That Could Struggle: Gap (GPS)
Gap stock had been performing incredibly well until the company reported earnings.
Coming into earnings, which were reported on Nov. 24, Gap was up more than 400% and hitting new 2020 highs. Then the stock recorded a one-day loss of almost 20% following the report and has shown no ability to garner upside momentum since.
So what was so bad about the quarter?
At a time where some retailers are doing quite well, Gap is struggling. Profit of 25 cents per share missed expectations by 2 cents, while declining from 37 cents a share in the same period last year.
Online sales jumped 61% year over year, but that figure is lagging the growth the leaders are seeing in the sector. Further, the increasing costs associated with its online business are weighing on the bottom line.
This is not an easy time for retailers, but given the increasing lockdowns, Gap is going to struggle to thrive. And when it comes to this industry, we only want the ones that will thrive.
Macy’s (M)
I really don’t like to include Macy’s on this list of doomed retailed stocks, because it really is a quality company.
Management has made the shift to an omni-channel operation and it continues to do pretty well. For instance, last quarter it reported a top- and bottom-line beat. Further, the stock has done quite well lately, rallying 78% in the last month.
That said, Black Friday was a disappointment for brick-and-mortar operators. That’s no surprise given Covid-19, however, what catalyst exists after the holidays?
For Macy’s I fear the good news doesn’t have much gas left in the tank.
The department store group has been struggling for years and that was before a pandemic came sweeping through. When vaccines are widely available, it doesn’t seem like Macy’s is going to be the go-to destination for consumers.
Plus, the pandemic put extra pressures on clothing retail. As Laura Gonzalez, Ph.D., associate professor of Finance at California State University, Long Beach, wrote in an email to InvestorPlace, “The Federal Reserve has announced that, despite vaccine progress, we cannot expect economic growth comparable to that of 2019 until 2023. Therefore, consumers are being careful, especially with respect to office or party attire they are not going to need as much while working from home and with intermittent lockdowns and less travel.”
With J.C. Penney, Sears and others biting the dust, Macy’s is bound to receive some market share. However, those retailers didn’t go under because of company-specific issues. It was industry-specific that was their demise. That leaves concerns for those that are still going.
After a big run in Macy’s stock, I’m cautious on this name entering 2021. Plus, digital sales increased just 27% last quarter. I don’t know that it has the online presence necessary to thrive.
Kroger (KR)
When the coronavirus picked up momentum in Q1 2020, so too did Kroger. It was one of the so-called coronavirus stocks to buy, as consumers flocked to grocery stores. They were stocking up on everything from soup to toilet paper and making all their meals at home.
It was a huge catalyst for Kroger. But just like Zoom Video (NASDAQ:ZM) and some of the other Covid-19 plays are no longer reacting to the surge in new cases, Kroger stock isn’t either. In fact, shares recently hit their lowest levels since May.
Kroger is three quarters of the way through its fiscal year, working on its fourth quarter now. For the year, consensus expectations call for 8.5% revenue growth and 53% earnings growth. For what it’s worth, management guided for earnings growth of 50% to 53%, so estimates sit at the high end of that range.
Will Kroger disappoint? I don’t know. But I do know that estimates call for a 3.5% revenue dip next year and a near-20% haircut to earnings.
Unlike many of the tech stocks that will build on this year’s growth next year (albeit at a slower rate, obviously), Kroger will likely experience negative growth as more restaurants open up and people get back out in the world.
Kroger will be around for many decades to come, but one can see why the stock has been lagging.
Wayfair (W)
E-commerce stocks have exploded higher this year and for obvious reasons. However, in the case of Wayfair, this stock was on the brink of collapse before Covid-19 came along. In fact, without a pandemic this company could have been doomed.
At its summer high, Wayfair stock was up just over 1,500% from the March lows. Since then, the stock has fallen about 30%. Perhaps shares are just consolidating those massive gains and are preparing for the next push higher. After all, this name trades at less than two times revenue, commanding a market capitalization of roughly $25 billion.
However, I don’t know that a pandemic can be the thing that saves this company long term. While analysts do expect sales to climb another 12.5% next year, they forecast earnings to be nearly cut in half in 2021.
In 2019, Wayfair lost about $8 per share. In 2020 and 2021, it’s forecast to earn $4.44 a share, then $2.40 per share. Obviously the company could prove its doubters wrong, but I would rather stick with the higher-quality online retail stocks at this time.
Overstock (OSTK)
Overstock is similar to Wayfair, although I think the former is in much better shape. For starters, Overstock’s total assets are almost double its total liabilities.
However, I still worry about its coming year. Like Wayfair, Overstock operated at a loss in 2019, losing $3.46 a share. In 2020, estimates call for the bottom line to swing to a profit of 90 cents a share on revenue growth of 72%.
While Overstock can also prove the analysts wrong, estimates for 2021 currently call for revenue growth of just 1%. On the earnings front, consensus expectations call for an 83% decline to just 15 cents per share.
On the plus side, Overstock has swung to a positive free cash flow state over the trailing 12 months. That’s despite reporting negative free cash flow for at least four straight years. It will probably have a solid fourth quarter, too.
I just wonder about Overstock’s longevity. While certain online trends will remain after Covid-19, will it be enough? Shares were down about 90% from the 2018 peak the week before the coronavirus selloff. Then rallied about 5,000% from the March low to the 2020 high. That just doesn’t seem sustainable.
Village Super Market (VLGEA)
Certainly not the largest stock on this list of retail stocks — it’s actually the smallest — Village Super Market may not be investors’ go-to retail stock. At $336 million, this is a small market cap compared to many retailers.
To start with the good, Village Super Market is a profitable company and has had solid growth this year. It also does a lot of good for its community. Those are great attributes for a company and I like seeing that in the world. Further, this name kicks out a dividend yield in excess of 4%.
But if we are looking for retail stocks to buy that can give us a superior return, I don’t know that Village Super Market is the best place to park our cash.
First, there is essentially no analyst coverage on this name, making it difficult to assess its potential. Now granted you can listen to the conference calls and sign up for the press releases, but how many investors actually do that? The analyst community is not the most accurate source in the world, but it’s better than nothing.
Further, its stock hasn’t gone anywhere. Shares are flat in 2020, a year the business is seeing strong growth. In each of the three quarters it has reported, revenue growth has been in the double digits. In the prior 20 quarters, revenue growth did not eclipse 3%.
If shares are flat now, what can we expect when revenue growth returns to pre-coronavirus levels?
The stock is down 9.6% over the past 12 months, flat over the past three years, down 9.4% over the past five years and is down 28.9% in the past decade even amid the marvelous rally in the overall market.
Vroom (VRM)
Vroom is the youngest public company on our list of retail stocks. The company came public in June, opening for trading around $40 per share. By late August, the stock has notched a high north of $75.
However, the good luck streak ended there.
Shares have declined for three straight months. Down about 5% in December, Vroom is working on its fourth straight monthly decline. It’s hard to get too bearish on this name though, with shares already down 54% from the highs. For some, that may even be enough to begin accumulating a long position.
What is Vroom? It’s essentially a digital shopping and selling experience with cars. A contactless, dealership-less way to buy a vehicle. In a world filled with Covid-19 fears, this is a great alternative.
But what happens when Covid-19 is no longer in the picture? What about the other companies that already operate in this space? There are a lot of questions for this new IPO.
That said, its balance sheet is in good shape and forward estimates are solid. Analysts expect 2021 revenue to grow 84.5% to about $2.5 billion. That leaves shares trading at roughly 2 times forward revenue estimates. That’s not wildly expensive.
At the end of the day, investors are going to look at the relative weakness in the stock price as an opportunity or a warning sign.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.