The holiday sales season tends to be a “make or break” window for retail stocks. Many companies inch along throughout the year, posting similar stats quarter over quarter (QOQ). And then, they get their holiday season surge. Because of this cyclical business, companies that can’t hit a home run during December usually crash hard once earnings post.
But you don’t have to wait for mid-February or March to see which companies lost the bubble on holiday sales. These three companies are set to lose this holiday season and are among the retail stocks to avoid that all investors should be wary of.
Children’s Place (PLCE)
Some retailers successfully adapted to changing interest rates and shifting consumer sentiment. These companies stayed viable through cost-cutting, improved market productization, and meeting consumers where they need them. Unfortunately, Children’s Place (NASDAQ:PLCE) is not one of those success stories.
Frankly, investors holding onto this retail stock to sell should have seen the writing on the wall this summer. In July, PLCE closed its headquarters in New Jersey, laying off 138 employees at the same time. If that wasn’t bearish enough, the retail company’s recent earnings should be your final red flag before the holiday sales season finishes.
In that quarter, retail sales fell 7.3% and gross profit dropped by $14.8 million. The company CEO said, during the earnings call, she was “pleased with our ability to drive top-line above our expectations throughout the third quarter.” It’s easy to beat expectations you’ve set yourself when they’re low enough. And, touting a headquarters closure and layoffs as beneficial to your top line doesn’t quite inspire confidence for the stock moving forward.
International Flavors & Fragrances (IFF)
I wrote about retail stock International Flavors & Fragrances (NYSE:IFF) in August. Since then, shares bounced back by about 15%. But that doesn’t make this stock a buy today. Most of the stock’s performance came on the heels of a better-than-expected earnings report. But, though IFF surpassed low expectations, a closer look reveals that this retail stock is in trouble.
In the report, IFF’s net earnings posted a 35% year-over-year (YOY) loss, with net sales falling 8% over the same period. At the same time, R&D and SG&A expenses both climbed 8%. This means that, in a constrained economy, this luxury retail stock is simultaneously losing revenue streams while seeing expenses increase across the board. That’s a dangerous divergence that indicates the company’s management can’t adapt to this economic cycle.
That’s evident by the firm’s $450 million interest expense, which comes dangerously close to exceeding its current cash balance. While IFF’s current ratio, 1.74, looks great, it’s a deceptive liquidity measure. Since current ratios account for inventory, lagging sales mean that IFF can’t count on quick liquidation of those assets to pay debt. Instead, the company’s quick ratio is more reliable and consistently sits close to or below 1 – a dangerous position for a retail stock.
ContextLogic (WISH)
Once upon a time, ContextLogic (NASDAQ:WISH) was a meme stock trading astronomically high. Those days are long gone, though, and this online retail stock is on its last legs.
The company’s operational model is tailor-made for the pandemic era, as cheap and often amusing products drew in bored shoppers. In fact, its clever marketing strategy centered on social media ads highlighting its oddest offerings were memes in their own right. They sent droves of buyers to WISH’s marketplace. During that era, active user counts hovered in the low-100 million range. Since then, though, WISH has seen fewer than 20 million on the platform.
Likewise, the company’s mid-pandemic revenue was north of $2.5 billion but sits at a paltry $357 million today. Retail traders hoping for a short squeeze seem to be the only party keeping this loser retail stock afloat, but there isn’t much hope of recovery on the horizon.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.