With the current headlines about the supply chain crisis, it may seem iffy to invest in retail stocks right now. Or is it? This latest issue, a side effect of the post-pandemic economic recovery, is affecting individual companies within the sector in different ways.
Some retailers are well positioned to ride out this headwind. Others? Not so much. The takeaway? You may be able to find opportunities within the space, as investors have overestimated the level of impact. For instance, in a recent article, I highlighted several retailers, like Gap (NYSE:GPS) and Victoria’s Secret (NYSE:VSCO), where supply shock concerns may be overblown.
That said, there are plenty of names in this space that are clear cut “avoid” situations right now. Not just because of supply chain headwinds. Issues like inflationary pressures, a post-pandemic drop off in e-commerce and other issues independent of the supply chain crisis could tank their respective shares. Or worse, send them toward Chapter 11 bankruptcy.
So, among retail stocks, which ones should you not, under any circumstance, buy right now? These seven are facing a wide variety of challenges and could be at risk of seeing a big drop in price over the next 12 months:
- Blue Apron (NYSE:APRN)
- Casper Sleep (NYSE:CSPR)
- Express (NYSE:EXPR)
- Jumia Technologies (NYSE:JMIA)
- Joann (NASDAQ:JOAN)
- CarLotz (NASDAQ:LOTZ)
- Tuesday Morning (NASDAQ:TUEM)
Retail Stocks: Blue Apron (APRN)
Throwing APRN stock on this list may seem ridiculous to some right now. After all, following the news of the prepared company’s planned $78 million capital raise, shares have been on a tear.
Trading for just under $4 per share in mid-September, Blue Apron stock has more than doubled in price. Today, it changes hands for around $9.15 per share. But while this capital raise may help this company (which has long been unprofitable) afloat, it’s hard to see it sustaining, much less adding to, it’s recent gains.
Why? There has been a lot of talk of the company seeing a boost in demand during the Covid-19 outbreak. To some extent, this has been true. But it’s a bit an exaggeration to say it has been a game-changer. Sales have gone up, yet it’s still operating in the red. Putting it simply, if the “stay at home” economy couldn’t move the needle, you can imagine its prospects in a post-Covid environment.
Especially as other issues, such as rising food costs, will affect its margins going forward. Add in the fact that, with the $78 million it’s raising, shareholders in this small-cap stock (market capitalization of $220 million) are going to get severely diluted, and the end result does not look very promising. After its big run-up, and the possible disappointment that could follow, it’s best to sit out on it.
Casper Sleep (CSPR)
When it comes to growing revenue, Casper, a direct retailer of mattresses, hasn’t exactly been sleeping on the job. Since 2017, it has grown its annual sales from around $251 million to around $553.2 million.
Yet what it hasn’t managed to do is make itself a profitable business. This alone wouldn’t necessarily be a problem. Assuming, of course, it had the cash on hand to sustain losses, until it finally scaled up to a point where it got out of the red. Unfortunately, that’s not the case here.
In fact, when it comes to Casper Sleep’s cash reserves are running dry. It has been forced to get a waiver on certain debt covenants, in order to avoid going into default. This latest development has compelled Wedbush’s Seth Basham to downgrade the stock, from the equivalent of “buy,” to the equivalent of “hold.” The analyst also lowered his price target, from $10.50 per share to $4 per share. CSPR stock trades for around $3.64 per share today.
Hemorrhaging cash, dealing with the inflationary/supply shock issues, and now forced to renegotiate terms with its lenders, it wouldn’t be surprising if Casper found itself at risk of Chapter 11 in 2022. To avoid the possibility of sleepless nights, stay away from this direct-to-consumer name.
Retail Stocks: Express (EXPR)
EXPR stock may have been a fun meme trade earlier this year. But investors buying it as a long-term investment haven’t exactly been smiling. Down more than 72% from its meme stock highs, at $3.84 per share, the mass-based apparel retailer may seem like a great contrarian buy at first glance.
However, take a look at its fundamentals. It’s obvious why the market has been avoiding it since it fell out of favor with the Reddit crowd. Sure, it handily beat expectations when it last reported quarterly results back in August. It has also touted that its pivot into e-commerce (with a goal of hitting $1 billion in annual online sales by 2024) is working out so far.
But with the inflationary and supply chain risks currently at hand, there’s a good chance Express falls short of expectations in the quarters ahead. Worse yet, even a slight deterioration in results could have a devastating impact as the company is highly levered. Specifically, it has just $34 million in cash against $955.4 million in debt and lease liabilities.
So, barring the long-shot chance another “meme stock wave” crops up, sending former Reddit favorites like EXPR stock higher once again, what’s the best play here? Even at prices well below its 52-week highs, there’s little reason to buy.
Jumia Technologies (JMIA)
With its reputation as Africa’s answer to Amazon (NASDAQ:AMZN) or Alibaba (NYSE:BABA), it’s easy to see why many saw big potential in it when they bid up JMIA stock from around $10 to nearly $60 per share in late 2020/early 2021.
However, the buzz surrounding it didn’t last. After getting one last boost from the meme stocks trend, Jumia Technologies has since been on an extended slide. Today, it trades for around $17.50 per share. To some, this may be an overreaction, as it stands to become the leading e-commerce platform across the African continent, just like how MercadoLibre (NASDAQ:MELI) became a powerhouse in Latin America.
But as my InvestorPlace colleague Stavros Georgiadis argued back in September, so far the company has yet to deliver. Mainly, because Sub-Saharan Africa has been especially hard-hit by Covid-19. In contrast to other economies, where the virus has been a boon for e-commerce, the same can’t be said for Jumia’s operations. In 2020, its annual sales declined, falling 11.35% to $159.17 million.
Even worse is the fact this company’s pandemic headwinds aren’t ending anytime soon. Due to vaccination challenges, it’s going to take time before “recovery mode” finally arrives for its main market. With $638.7 million in cash on hand, Jumia may have enough to keep its lights on, ahead of an economic rebound.
Yet as it’s burning through hundreds of millions per year, the meter’s running. With high risk it fizzles out or it has to resort to dilutive secondary offerings to stay in business. And at its current prices it’s doubtful this stock has bottomed out.
Retail Stocks: Joann (JOAN)
After more than a decade as a privately held company, Joann’s private equity owner (Leonard Green & Partners) seized the opportunity provided by a booming stock market, and took the fabric chain public again in March.
However, after debuting at $12 per share (below its proposed price range of $15-$17 per share), JOAN stock hasn’t done much performance wise. Since its debut, it’s down nearly 15%. While the retailer benefited from increased interest in arts-and-crafts during 2020’s Covid-19 lockdowns, this boost has come and gone. For the quarter ending July 31, 2021, net sales were down nearly 30% year-over-year.
Along with a falling demand during “recovery mode,” Joann is facing big challenges from the global supply chain crisis as well. As one sell-side analyst (Cristina Fernandez from Telsey) noted in her September downgrade of shares that skyrocketing inventory shipping costs will likely put pressure on results in the coming year.
Factor in its high debt and lease liabilities ($1.72 billion), which serves as a double-edged sword, and JOAN stock may be set to take a big tumble from current prices (around $10.25 per share). Putting it simply, it makes sense why the short-side with this name is so crowded. As of Oct. 15, 26.24% of its outstanding float was sold short. With results likely to get bad before they get better, this is one of the retail stocks to avoid right now. That’s true even though it may look tempting as a short-squeeze play.
CarLotz (LOTZ)
Going public via a SPAC (special-purpose acquisition company) merger, buyers of LOTZ stock have found themselves with a lemon, so to speak. Since the SPAC deal close, shares in this used car marketplace operator have fallen significantly from $10 per share to around $3.60 per share today.
But despite this big price decline, and even as it’s in a fast-growing industry (online auto sales), there’s no reason to buy this retail stock right now. Why? Due to the used car shortage, the company withdrew its fiscal 2021 guidance back in August, as the scarcity of vehicles is materially affecting its consignment-based business model.
That’s not the only way the shortage is affecting CarLotz’s results. The company has also noted that it’s experiencing gross profit compression due to this issue. In short, expect another quarter of disappointing results, when it next releases earnings after the close on Nov. 8. To top it all off, even with these challenges, the company hasn’t taken its foot off the gas pedal.
As seen in recent press releases, it’s continuing to ramp up operations. Yes, if the current used car supply crisis winds up being a short-term problem, in hindsight charging ahead could look to be a smart move. But if this issue, caused by the global chip shortage, carries on well in 2022? Continued cash burn could drive another big drop for LOTZ stock.
Retail Stocks: Tuesday Morning (TUEM)
Unlike the six retail stocks mentioned above, Tuesday Morning almost found itself six feet under when Covid-19 shutdowns became the straw that broke its back, and forced it to file for bankruptcy in May 2020.
As a Seeking Alpha commentator discussed a few weeks back, shareholders in this company saw their positions diluted, but managed to avoid a wipeout. That’s a rarity when it comes to Chapter 11 situations. Post-bankruptcy, TUEM stock even saw a brief boost, rallying from $2 per share, to briefly above $5 per share.
In recent months, though, the close retailer’s shares have dipped back. Tuesday Morning may have thought it was out of the woods after its reorganization. But with the supply chain crisis hurting its margins, tough times continue, as it expects to report adjusted EBITDA losses for the current fiscal year (ending June 2022).
Sure, another trip to bankruptcy may not necessarily be in the cards. While it expects negative EBITDA, the company believes it will be “cash flow” neutral” for FY22. The situation isn’t getting worse, but it’s certainly not getting better. For the time being, don’t consider this a bottom-fisher’s buy just yet.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.