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These Retailers Should Be Avoided

Earnings season is coming to an end, but there is a sector that has a few companies that are still reporting and their numbers are very important because they show how consumers feel about spending.

The sector is retail. A handful of retailers reported this week, and of those, there are two that investors should steer clear of as their financial results for the quarter make it unlikely they will be able to turn around in the short term. They are Sears Holding Corp. (NASDAQ: SHLD) and Abercrombie & Fitch (NYSE: ANF).

 · The softer side fades

Sears’ performance continues to disappoint. It saw its sales in the first quarter fall to $5.4 billion from $5.9 billion for the same period in 2015. Its losses widened to $471 million from $303 million during the first quarter of 2016.

One of the problems is Kmart. Its same-store sales fell 5%. Sears has closed many of the Kmart stores, seemingly to no avail. I would champion selling off or closing the remaining stores, however Sears is taking a different route that may worsen its situations.

To stem the company’s overall losses, Sears is considering ways to monetize its most popular assets. They include its Kenmore, Craftsman and DieHard brands. The Sears Home Services repair business could also be done away with.

Plans entail using those assets the finance the company’s transformation strategy. It has closed a $750 million term loan, and together with a $500 million secured loan facility, it has $1.25 billion of committed financing. The goal is to enhance its liquidity.

“As we have consistently demonstrated, we will continue to take actions to adjust our capital structure and manage our business to enable us to execute on our transformation while meeting all of our financial obligations,” said the company’s chief financial officer.

It could also partner with other companies to expand the sale of its brands, which are now only sold in Sears and Kmart.

Also, the company, earlier this month, announced that it would open small appliance stores to compete with J.C. Penny, which recently began selling appliances again. That is a much better idea because it would allow the company to hold on to its most valuable assets.

The effects of the fickle teen market
When Abercrombie & Fitch came on to the retail scene, it popularized its brand with racy, sometimes offensive ads featuring scantily clothed teens. Now the company is struggling on its top and bottom lines, as it continues to face a variety of issues.

For the last quarter, its earnings per share loss were $.53, compared to analysts’ estimates of $.51. The company’s executive chairman said the results reflect “significant” traffic headwinds, particularly in international markets and in its U.S. flagship and tourist stores. He added that in the face of the headwinds, the company was encouraged by its U.S. business, where comparable sales improved in the Hollister brand, and its gross margin rate increased “meaningfully” for both brands.

 · The challengess

Stock performance for the retail sector is down almost 14% since the beginning of the year. Many assumed that retailers would benefit from the trickle-down effect of lower gas prices. It was thought that consumers would take those dollars and go shopping.

Well, they did…just not to the traditional retail shops. Amazon has grown to be a formidable player in the retail space as consumers choose it for their shopping needs. Amazon’s low prices and convenience in delivering services are two of the reasons it is thriving. While it took time for customers to warm up to online retailers like Amazon over brick-and-mortar companies, that has changed.
By the time brick-and-mortar retailers came around and began selling via the Internet or improving their websites, Amazon was well ahead in the game.

Also, it seems that consumers have become spoiled when it comes to how much they are willing to pay for items. If it’s not on sale, consumers are less likely to buy it. Even more attractive to consumers are discounters like those that make up The TJX Companies. One of the stores it owns is Marshalls, which does not offer sales at all. Still, you’d be hard pressed to not find one of their stores filled with customers on any given day.

Sears and Abercrombie & Fitch face the challenges that require long-term strategic plans to fix. At this point, I don’t see that happening this year. I would carefully review these stocks on their fundamental strengths and potential to greatly improve before investing in them.

2 responses to “These Retailers Should Be Avoided”

  1. Nice article, good advice.

    Dennis McCain

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