7 Retail Stocks to Drop as Consumer Spending Slows
Although the data for January came in strong, economists, businesses and the market are still bracing for a consumer slowdown this year. With this in mind, it may be best to lower your exposure to the top retail stocks to sell.
With the Federal Reserve intending to continue raising interest rates, in order to bring down inflation, the operating performance of retailers could continue to worsen. Retail stock valuations may not yet be fully factored in.
Even as they’ve been beaten down since the start of the bear market, more declines may be in store (pun intended). Shares in retailers, high-quality and low-quality alike, could be severely affected in the near-term.
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So, what are the top retail stocks to sell right now, ahead of this likely slowdown? Cash out and/or avoid these seven. Each of them currently earns low marks (a C, D, or F rating) in Portfolio Grader.
a.k.a. Brands (AKA)
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a.k.a. Brands (NYSE:AKA) is a digital-first retailer of apparel. Founded in 2018, and going public in 2021, the company acquired several apparel brands, including Princess Polly, Petal & Pup, and Culture Kings.
Over the past year, a.k.a.’s operating performance has taken a severe turn for the worse. During 2022, adjusted EBITDA fell by nearly half, and the company significantly wrote down the carrying value of two of its acquired brands, resulting in an extremely high net loss for the year ($176.7 million).
Following the reporting of its latest results, Piper Sandler’s Edward Yruma pulled his prior “overweight” rating on AKA stock, citing the high likelihood of challenged operating results “for the foreseeable future.” AKA fell more 30% on this downgrade, yet as a consumer slowdown could drive more declines for this F-rated retail stock, there’s no reason to go contrarian here.
Source: Jonathan Weiss / Shutterstock.com
In 2020 and 2021, Bark (NYSE:BARK) rode the wave of renewed popularity for subscription box services. The company, which offers Barkboxes, or subscription boxes tailored for dogs, with dog toys, treats, and chews, experienced a big jump in revenue.
Reporting impressive growth, the company had a successful initial public offering (or IPO) in June 2021. However, since the IPO, BARK stock investors have experienced heavy losses, with shares down by around 90%. During this time frame, top-line growth has screeched to a halt, and losses have ballooned.
Trading for just over a dollar, this penny stock may look to some to be a bargain, yet there’s a good reason BARK earns a D in Portfolio Grader, and is one of the top retail stocks to sell.
Expected to continue reporting net losses for at least two more fiscal years, BARK’s comeback potential is highly questionable.
Big Lots (BIG)
Admittedly, there are many ways in which Big Lots (NYSE:BIG) could appear attractive to investors unafraid to go against the grain. The big box retailer continues to pay out a big dividend, making it appealing to income investors.
BIG stock also is heavily shorted. According to Fintel.io, 32.2% of BIG’s outstanding float has been sold short. This may make it appealing to speculators on the prowl for stocks that could make big moves on a squeeze. That said, the most likely “big” outcome for shares in the near-term may be additional big losses.
Although the company reported narrower-than-expected losses during the last quarter of 2022, it did guide for a low double-digit decline in same-store sales for the current quarter. Given that, with the prospects, further improvements to its fundamentals may prove elusive for now, consider it best to steer clear of this D-rated retail stock.
Costco Wholesale (COST)
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Costco Wholesale (NASDAQ:COST) has historically been a strong-performing stock. Shares in the discount club retailer have gained by more than five-fold over the past decade. However, that doesn’t mean that now is an ideal time to enter or add to a position.
Sure, as seen during prior economic downturns, Costco may be poised to show higher resilience than other general retailers such as big box stores. While a consumer slowdown may not result in earnings declines, shares may be in for an additional pullback.
Why? With Costco’s growth slowing down, the market may continue to grow hesitant about giving the stock (currently trading for 35.8 times earnings) a rich valuation. The opportunity to make COST stock a buy may re-emerge, but for now it’s one of the retail stocks to avoid. COST earns a C rating in Portfolio Grader.
Duluth Holdings (DLTH)
Duluth Holdings (NASDAQ:DLTH) markets and retails apparel under the Duluth Trading Co. brand. Until a few years ago, it was growing at a steady pace, and consistently profitable.
More recently, though, the company’s financial performance has taken a hit, causing sharp declines for DLTH stock. Last fiscal year (ending January 2023), sales declined by around 6.5%, from $698.6 million to $653.3 million. Inflation has squeezed margins, resulting in earnings of just 7 cents per share, versus 91 cents per share during FY21.
Per Duluth Holdings’ latest guidance, there will be little-to-no improvement in the company’s operating performance this fiscal year. Investors reacted positively to the last results, despite these lackluster results, but don’t view this as a sign that shares are making a recovery. As a consumer slowdown could weigh on future results, a further pullback isn’t out of the question for DLTH.
Amongst the retail stocks to sell, ThreadUp (NASDAQ:TDUP) is another one that could continue reporting growth this year.
An operator of an online apparel resale platform, household belt-tightening may not end up having a tremendous impact on sales volume.
Although the company’s top line is and could keep on moving in the right direction, it’s a bit of a different story with the bottom line. Even as net losses are expected to narrow, said losses stand to be substantial.
This raises the question whether this unprofitable firm will need to replenish its cash position with a dilutive capital raise down the road.
While ThreadUp’s latest earnings report was well-received, resulting in a 51.2% jump for D-rated TDUP shares on Mar 7, it’s possible the market is overly pricing-in the potential for further margin improvement.
Source: Sundry Photography / Shutterstock.com
Much like Costco, Walmart (NYSE:WMT) is another example amongst retailers of a high-quality stock that in the near-term belongs in the “sell” category.
After initially sinking last year, as fears about a recession took hold, WMT has partially rebounded.
Over the past six months, WMT stock has bounced between $130 and $150 per share. Yet even as shares trade at the lower end of this range, slowing growth because of the current economic environment may push it even lower in the months ahead.
Although analysts continue to forecast a jump in earnings this fiscal year, these forecasts have been walked back in recent months, from $6.60 to $6.12 per share. With so much uncertainty regarding a consumer slowdown in 2023, and a rebound in 2024, WMT’s valuation premium (at 32.6 times earnings) over the S&P 500 (at 20.9 times earnings) could continue to narrow.
On the date of publication, Louis Navellier had a long position in COST. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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