With a good deal of problems facing the domestic and global economies, it’s time to consider these top retail stocks to sell. Fundamentally, one of the biggest drivers of this cautionary take centers on the Federal Reserve.
When the coronavirus pandemic struck, the Fed expanded the size of its balance sheet through bond buybacks. Logically, the purchasing of bonds introduced significant liquidity in the system. However, as shoppers can attest, too much liquidity fueled inflation. Of course, such a circumstance presents pressures for retail stocks, particularly of the discretionary variety.
Now, the Fed seeks to shrink the size of its balance sheet. Therefore, the net result is a reduction of liquidity. However, too much reduction creates deflation effectively. Then, there are fewer dollars chasing after more goods. This too if done aggressively bodes poorly for retail stocks as job losses (i.e. recession) become a major concern. Indeed, the central bank takes this risk very seriously.
Unfortunately, the issue with the new normal is that whether we have inflationary or deflationary forces dominate, all roads lead to likely pain. Therefore, investors must consider unwinding the riskiest retail stocks in their portfolios.
| GPS | Gap | $10.74 |
| FL | Foot Locker | $32.18 |
| AEO | American Eagle Outfitters | $11.13 |
| ANF | Abercrombie & Fitch | $18.19 |
| CVNA | Carvana | $14.87 |
| MODG | Topgolf Callaway Brands | $17.80 |
| PTON | Peloton Interactive | $7.52 |
Gap (GPS)
A once-popular and trendy apparel retailer, Gap (NYSE:GPS) finds itself struggling for oxygen. Since the start of this year, GPS shares fell almost 43%. To put this figure into context, the benchmark S&P 500 is down about 21% during the same period. To be fair, GPS gained 26% in the trailing month, making for a surprising contrarian wager. Nevertheless, astute investors should probably back off.
According to Gurufocus.com, Gap may be a possible value trap. The investment resource also identified GPS as one of the retail stocks suffering from high risk; specifically, sensitivity to economic or industry trends. Much of the problem centers on its less-than-desirable resilience in the balance sheet combined with a poor growth trek.
Notably, the company’s three-year revenue growth rate sits at 0.6%, below the industry median’s 2.2%. Also, its three-year free cash flow (FCF) growth rate dipped into negative territory to the tune of 44.4%. With a negative return on equity to boot, Gap represents one of the retail stocks to avoid.
Foot Locker (FL)
A sports apparel retailer, Foot Locker (NYSE:FL) fundamentally suffers from competitive pressures. Mainly, some of the top brands in this space now offer their products directly to their customers. That leaves Foot Locker largely playing the role of the middleman entity, which isn’t pleasant under this economic ecosystem. After all, why bother going to the store (using gas and time) when the desired products can be shipped directly to home?
It turns out, traders likely have the same questions about FL and similar retail stocks. Since the beginning of this year, FL dropped over 31% of its equity value. However, in this case, the nearer-term trajectory remains negative. For instance, in the trailing month, shares dropped over 9% of market value.
According to Gurufocus.com, Foot Locker is a possible value trap. That’s not surprising because the resource warned its users that FL may suffer from a shrinking business. Indeed, while its three-year revenue growth rate stands at 8.1% (above the industry median), the company performed relatively poorly in the quarter that ended July 31, 2022.
Back then, revenue declined 9.2% on a year-over-year basis. Also, operating income fell by half. This is clearly one of the retail stocks to be cautious about.
American Eagle Outfitters (AEO)
A generation ago, American Eagle Outfitters (NYSE:AEO) represented one of the popular apparel brands. It’s what the cool kids bought. Nowadays, not so much. Indeed, the price chart provides all the evidence you need. On a year-to-date basis, American Eagle shares dropped almost 58% in equity value. And on a trailing five-year basis, AEO still finds itself below parity by a shocking 22%.
To be fair, AEO swung higher by 9% in the trailing month. Nevertheless, outside of extreme contrarian trades, it’s difficult to see the fundamental value for American Eagle. According to Gurufocus.com, AEO may be a possible value trap. On paper, the underlying company prints attractive stats, such as a forward price-earnings ratio of 10.7 times (below 62% of its peers).
However, you don’t want to let math tricks lull you into not recognizing economic fluctuation risks. Frankly, for the current generation of youth, American Eagle lacks pizzazz. Therefore, its three-year revenue growth rate of 2.3% is middling. It’s another one of the top retail stocks to sell
Even more problematic, in its latest quarter ended in July 2022, revenue came in flat. As well, the company posted a net loss of $42 million as opposed to a net income of $122 million in the year-ago period. Again, the facts state that AEO represents one of the retail stocks to avoid.
Abercrombie & Fitch (ANF)
While I didn’t intend to target apparel-related retail stocks, Gurufocus.com’s screener identified the most vulnerable names. Unfortunately, the apparel sector presents significant concerns. For instance, Abercrombie & Fitch (NYSE:ANF) may have provided prior generations with compelling threads. Today, ANF struggles badly, with its share price down over 50% YTD.
To be completely transparent, ANF did gain almost 12% in the trailing month, which is certainly not nothing. However, I fail to see how this will fundamentally change the bearish trajectory. Per Gurufocus.com, ANF brings a possible value trap to the table. Again, it’s not surprising. With so many similar brands competing for the same shrinking pie, the narrative will likely only get more difficult.
While I wouldn’t characterize Abercrombie & Fitch as a bankruptcy risk – it does have decent (though not great) strengths in the balance sheet – its forward projection raises questions. Currently, the company’s three-year revenue growth rate stands at 4.5%, slightly better than average.
However, in its July 2022 quarter, ANF posted revenue that slipped 7% YOY. As well, it posted a net loss rather than net income like in the year-ago quarter. Thus, ANF is one of the retail stocks to avoid.
Carvana (CVNA)
At the first mention of Carvana (NYSE:CVNA), the bearish argument almost speaks for itself. Involved in the auto sales business, Carvana suffered from both skyrocketing inflation and more recently, skyrocketing interest rates. Either way, these two monetary forces imposed significant pressure on the underlying business. It’s another one of the top retail stocks to sell
Still, I’m not entirely negative about auto-sales-related retail stocks because of fundamental demand. With the average age of vehicles on U.S. roadways hitting a record 12.2 years, it makes sense for many households to replace their cars rather than to repair a money pit. However, CVNA specifically raises serious questions.
For one thing, shares slipped over 94% on a YTD basis – yes, you read that right. Financially, Gurufocus.com rates Carvana unsurprisingly as a possible value trap. The problem is that while demand for transportation may be somewhat inelastic, the mechanism to purchase it is not.
Stated differently, why should anyone deal with the higher prices (associated with greater conveniences) of Carvana when they can go directly to a brick-and-mortar dealership for a better offering?
Topgolf Callaway Brands (MODG)
According to its corporate profile, Topgolf Callaway Brands (NYSE:MODG) is an American global sports equipment manufacturing company that designs, manufactures, markets, and sells golf equipment. On some levels, golf-related retail stocks present an attractive case. That’s because lots of rich folks golf – it’s what they do for some reason.
Unfortunately, this stereotype did not pan out for MODG stock so far this year. Since the January opener, Topgolf Callaway shares fell 38%. That’s not too terrible considering some of the awful retail stocks mentioned above. However, in the trailing month, MODG lost over 10% of its equity value, reflecting both longer-term and nearer-term bearishness.
Financially, Gurufocus.com warns that Topgolf Callaway may be a possible value trap. It’s difficult to argue otherwise. Sure, right now, the company prints strong three-year revenue-related performance metrics. And even in Q2 of this year, Topgolf posted strong results on the top and bottom lines.
But with economic trends moving in the wrong direction, such sales and earnings growth may no longer be predictable. MODG is one of the top retail stocks to sell.
Peloton Interactive (PTON)
Once the toast of Wall Street during the worst of the Covid-19 pandemic, Peloton Interactive (NASDAQ:PTON) enabled people to stay fit while in quarantine. As several scientific resources pointed out, many people gained unwanted weight during the global health crisis. Those that didn’t – or even lost weight – may have been Peloton customers.
However, with the fading of the crisis, the narrative undergirding PTON and related retail stocks lost its sheen. As a result, since the start of this year, PTON hemorrhaged a worrying 80% of its equity value. As well, in the trailing month, shares slipped nearly 15%. No matter what, the underlying company can’t catch a break, which presents one reason to avoid it.
The other? At this point, the financial situation for Peloton raises many fears. Per Gurufocus.com, PTON may be a value trap. Sadly, it’s hard to see how management can work its way out of the hole. For instance, Peloton’s Altman Z-Score is 1.8 below parity, reflecting a fiscally distressed business.
Additionally, it features negative profit margins and sharply reduced revenue based on its latest quarterly report. With such a messy situation, it’s best to avoid Peloton. It’s also top on the list of retail stocks to sell.
On the date of publication, Josh Enomoto 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.