7 Retail Stocks That Are in Danger of Becoming the Next Sears

When the coronavirus first touched down uninvited onto our country, one of the worst-hit sectors was retail stocks. This of course is no surprise to anyone with a functioning brain cell. At the time, we didn’t know much about the new virus — and clearly, there’s much to learn. Therefore, when state governments imposed lockdown measures, we didn’t need much convincing.

Now that Covid-19 cases are thankfully declining, many are rethinking retail stocks, perhaps considering going the positive trade. It’s not just about declining cases as there’s now justification for the bullishness. Thanks to the prodigious efforts of the Trump administration and the continued focus of the current Biden administration, the vaccine rollout appears largely successful. Ironically, this is bipartisanship at work, even if Democrats and Republicans absolutely hate each other right now.

If you’re on the camp that retail stocks will rise significantly in value from here on out, they very well might. Don’t let this article dissuade you. However, the market has risks for both bulls and bears. And some retail names may face a longer-term correction, perhaps a catastrophe like what happened to Sears (OTCMKTS:SHLDQ).

Now before you start typing an angry email, I’m not suggesting that any of these retail stocks are going to zero. But I am invoking the Sears name because several retailers face a fundamental threat of losing relevance in the post-Covid world. Maybe they’ll recover and if so, that’s great. Just think of me as a California insurance agent — I’m not saying there’s going to be another big earthquake, but if there is, you want to be prepared.

Because not everything about this recovery is all that encouraging. For one thing, we could have a resurgence due to a new Covid-19 strain. Our economy could falter — perhaps due to apparently worsening U.S.-China relations — which could then impact consumer spending. And it’s an ugly topic but hate crimes are not conducive for these and other retail stocks:

• Cinemark (NYSE:CNK)
• Tanger Factory Outlet Centers (NYSE:SKT)
• Simon Property Group (NYSE:SPG)
• Macy’s (NYSE:M)
• TJX Companies (NYSE:TJX)
• Ulta Beauty (NASDAQ:ULTA)
• Vroom (NASDAQ:VRM)

Again, hear me out — I’m not saying short these retail stocks, nor am I suggesting that they’re going to go bankrupt. I have no idea what will actually happen. Instead, I’m laying out reasons why these companies may face a relevancy problem.

Cinemark (CNK)

Let me just get this out of the way to avoid confusion. I own shares of Cinemark rival AMC Entertainment (NYSE:AMC). As I explained in a prior article about AMC, I’m uncomfortable about what lies ahead for the cineplex industry. In other words, I’m not trying to pit AMC against CNK stock or any of that nonsense.

To me, the entire industry is dangerous territory.

As you know (because you’ve probably done it yourself), the pandemic inspired many folks to simply cut the cord and go fulltime streaming. It made sense. Throughout much of last year, there were no live events, no sports and thus no reason to pay an exorbitant cable bill. With platforms like Netflix (NASDAQ:NFLX) or Disney’s (NYSE:DIS) Disney+, people can enjoy and only pay for the content they want.

Plus, you have the health crisis and CNK stock (along with AMC shares) was in deep, deep trouble.

Yes, these two have made a remarkable comeback. However, you’ve got to wonder when people will start feeling comfortable around others again. If that comfort level doesn’t come back up soon, the movie industry could suffer badly. And that will hurt many individual retail stocks that depend on residual revenue from moviegoer traffic.

Tanger Factory Outlet Centers (SKT)

One of the retail stocks that have captured significant attention on social media, Tanger Factory Outlet Centers on paper is simply tearing it up. On a year-to-date basis, SKT stock is up over 71%. Over the trailing year, shares are up nearly 183%. It just doesn’t seem like Tanger is a natural place to discuss a potential Sears problem lurking in the shadows.

Aside from the speculation, investors should consider something far more fundamentally worrisome. In the years leading up to the coronavirus pandemic, factory outlets began shifting their marketing campaigns to welcome Chinese tourists. As well, international outlets began taking notice, doing whatever they could to attract Chinese buyers.

But with the coronavirus bolstering racial biases, who do an increasing number of people not want to invite? Chinese people.

To be fair, anti-Chinese sentiment is not just in America, but in many other nations, including Asian countries like Japan. But what makes the situation in the U.S. worse is that racism against Chinese/Asian people has accelerated from slurs and verbal harassment to acts of violence, particularly against women and the elderly.

It’s a tricky topic because in America, you absolutely have the right to hate anyone you want, and that right to hate should not be infringed. But we’ve got to draw a line when hate turns into harassment and especially violence. Unfortunately, the hate is going to have an economic impact as well, which may hurt SKT stock.

Simon Property Group (SPG)

I have zero idea what political or ideological ideas that the managerial team of Simon Property Group have or support. However, if I had to guess, the executives must be cringing at right-wing media outlets doing everything they can to not portray the recent Atlanta shootings as a hate crime. Here’s why.

Even if right wingers succeeded in convincing every Asian American that racism is not a problem in the U.S., this would end up being a Pyrrhic victory. It’s not Asian Americans that need convincing but rather Asians globally. You see, when right wingers suppress genuine acts of hate, they play into the propaganda of Asian nationalists abroad. That means more fodder for Asian right wingers to portray the U.S. as an out-of-control racist country, which then hurts SPG stock indirectly.

How so? You just look at global tourism statistics. In the 1950s, Europeans were the dominant world travelers. With globalization and the rise of Asian powers, Asian tourists threaten to upturn the European-dominated paradigm.

In other words, if we want to restore stability for all U.S.-based retail stocks, we need to capture more of those Asian tourist dollars (which are pure profit for America, if you think about it), not less. Thus, racism against Asians is the exact antithesis of what SPG stock stakeholders should want.

Macy’s (M)

Following the pandemic-fueled lockdowns, Macy’s and other retail stocks levered to the department store business model suffered far worse than other sectors. With people not wanting to congregate in high-contact areas — plus the fact that Macy’s is an indoor retailer — it wasn’t a surprise that M stock cratered between late February through most of March last year.

But with the encouraging vaccine rollout sparking a decline in new Covid-19 cases, the bullish narrative for M stock has some fundamental justification. Of course, many speculators have not waited around for confirmation, instead piling into shares. On a YTD basis, M is up a whopping 33.5%, reflecting anticipation of pent-up demand.

Therefore, it’s possible that Macy’s and other retail stocks can keep the fire burning. At the same time, the company’s “Sears risk” shouldn’t be ignored. With e-commerce reflecting more of total retail sales in the U.S., the department store business model may be gradually becoming irrelevant.

Yes, Macy’s and others have been focusing on their e-commerce channels, but that brings on heavy competition. While this name isn’t one to short, you should also be careful with it.

TJX Companies (TJX)

An off-price department store giant, TJX Companies was one of the more intriguing retail stocks to buy in the pre-pandemic era. Nowadays, younger people don’t care as much about branded fashion as prior generations of young consumers. Therefore, it stands to reason that it shouldn’t matter if the branded fashion is off-season or slightly dated.

Further, with people coming out of college looking to upgrade their wardrobe at a reasonable price, TJX stock enjoyed a viable revenue channel. And no matter what the circumstance, everybody loves a good deal. Part of the allure of off-price department stores is bargain hunting. You never know what you’re going to find.

However, a big chunk of this narrative has come under fire because of the pandemic. With most white-collar workers working remotely, the need for apparel upgrades declined. In fact, CNN wrote an article suggesting that the coronavirus could end office clothing.

With the gradual return of workers to their cubicles, this narrative might not pan out. Still, I think investors should be cautious about TJX stock as an unexpected worsening of the pandemic would spell big trouble, even for discount retailers.

Ulta Beauty (ULTA)

As with other retail stocks, Ulta Beauty is one of those companies that have weathered the Covid-19 crisis very well. Over the trailing year, ULTA stock has gained nearly 57%. On a YTD basis, shares are up almost 8%. Moreover, ULTA is in striking distance of challenging, perhaps exceeding its all-time closing high. So, what’s the concern?

Primarily, that ULTA stock may be a beneficiary of the pent-up demand thesis, but that other, more sustaining catalysts may not help shares ride out the entirety of this crisis. Yes, it’s great that people are getting out of their homes — that’s according to government statistics. But with new Covid-19 strains running amok, this pandemic could again turn ugly.

I’m not saying it will, don’t get me wrong. But it’s a possibility that shouldn’t be overlooked.

Further, I’m not entirely sure how consumers are going to react to high-contact businesses specializing in health and beauty products. True, management has taken precautions and whatnot. But the brick-and-mortar space is under attack from various e-commerce competitors. As I said with the other retail stocks, I’d be careful.

Vroom (VRM)

Vroom is a curious name among this list of retail stocks because it focuses on its online platform to sell cars. Therefore, it would appear that VRM stock is one of the relevant plays in this broad sector. However, looks can be deceiving.

For a start, Vroom shares haven’t performed very well. Over the trailing year, VRM stock is down over 29%. YTD, we’re looking at 15.5% below parity. On the other end, rival Carvana (NYSE:CVNA) is up 295% and 4.5% over the same period, respectively. Adding insult to injury, CarMax (NYSE:KMX) is up almost 37% YTD, which makes Vroom’s lack of momentum troubling.

Clearly, this isn’t a demand issue — otherwise, CVNA and KMX wouldn’t be enjoying outsized gains. Instead, Vroom may be suffering from execution problems. Also, it’s very possible that CarMax and Carvana have already carved out the most viable places in the secondhand automotive retail market.

True, Vroom presents an interesting angle, providing a contactless way for buyers to purchase a new (well, new to them) vehicle. But it’s not that distinct from Carvana and consumers who want to save money can just go through physical dealerships or private transactions.

On the date of publication, Josh Enomoto held a long position in AMC.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.