The retail space can be unpredictable even at the best of times, so these retail stocks are definitely ones to avoid in the current environment. Debt levels have grown to uncomfortable levels for many of the sector’s players, and with rates rising and consumers tightening their purse strings, many retailers are between a rock and a hard place.
The retail stocks to avoid tend to be those that sell mid-to-lower-priced clothing. Not only are these consumers notoriously fickle, they also tend to have limited cash to splash. Consumer spending has been weakening considerably since the pandemic struck, so it’s best to sell these stocks or avoid these retailers completely this month.
Target (NYSE: TGT) stock is down 13% this year, and although it appears as a buying opportunity, it’s one to avoid. Target has become a huge part of American culture, which means the group’s brand power is far stronger than some of its peers.
But some of the shine is starting to wear off, as evidenced by weak traffic trends. The group’s 1% increase in store traffic in the last quarter gave investors little to celebrate and suggests business could be worsening for the bullseye brand.
In addition, weak margins make this a recipe for an underperforming retail stock. The group was boasting double-digit margins during the pandemic, but more recently management implemented an efficiency program to protect profitability. Its target is now margins of 6%, which is a paltry shadow of the pandemic’s booming business.
Notably, this would mark a return to normal, pre-pandemic times. But given that TGT shares are still relatively expensive for the sector, this group has further to fall before reconsidering a buy.
Stitch Fix (SFIX)
Stitch Fix (NASDAQ:SFIX) stock has been on a tear in July, but that’s made it exceedingly expensive for the value. The company’s business model, sending out boxes of specially selected clothes to busy, fashion-challenged customers, has never been enviable. It’s the kind of service you might try, and then abandon once the novelty wears off.
And it’s become even more avoidable now that people have less to spend. The group’s clothing is priced middle-of-the-road – not quite luxury but certainly not low-cost. Add in the styling fee and you have a setup for mass exodus as customers slide down the value chain to protect their disposable income.
That’s been clear in the group’s dwindling sales and customer numbers since the pandemic. The result has been heavy losses which, to Stitch Fix’s credit, have started to narrow, thanks to a massive cost-cutting initiative. The stock rose considerably, but the underlying reason for the improvement should be giving investors pause. It’s hard to see a world in which Stitch Fix makes a major comeback.
BooHoo (OTC:BHOOY) is the epitome of fast-fashion but it has plenty of challenges in that space.
BooHoo’s full year results were disappointing with revenue declines across all regions. This included a double-digit drop in the U.S., where the group’s been pinning its future growth aspirations. Most of the weakness can be attributed to the cost of living crisis which has seen customers run for the exit.
BooHoo spent a considerable amount increasing capacity in the U.S. in hopes of capitalizing on a growth opportunity. So the heavy declines were all the more painful. The larger problem is if customers are abandoning BooHoo as a go-to shop, the group could be in big trouble.
BHOOY is doing some work to improve its proposition, with acquisitions that will strengthen its portfolio and grow its potential marketshare. But building a business in times of trouble is a difficult endeavor, BooHoo is likely to suffer for a while.
On the date of publication, Marie Brodbeck did not hold (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.