Some of the most beaten-down names in retail might end up being your best bets in 2020.
That’s not to say there isn’t reason to be wary about some of these companies. You’re taking a risk when you invest in a struggling business, especially in the challenged retail industry, which has faced management shake-ups, falling sales, bankruptcies and rampant store closures.
But companies including Bed Bath & Beyond, Michael’s, Victoria’s Secret parent L Brands and DKNY owner G-III Apparel Group are looking like better and better investments in 2020, according to industry analysts.
Their reasoning is that these companies either have new management with a fresh vision or have seen so much value shaved off their stocks that seemingly the only way to go from here is up.
But just because a retailer has a new CEO doesn’t mean you want to put your money there. J.C. Penney, for example, is seen as a much riskier bet in retail today, despite it bringing in new CEO Jill Soltau in October 2018. Penney is especially weighed down by its heavy debt load and plethora of stores, many of which are struggling to grow sales.
Still, there are other risks that could be worth taking.
“After investors went on the defensive and flocked to lower-beta categories in 2019, we see opportunity for investors to ‘play offense’ (especially in early 2020) by coming back to some of the beaten-down names...” Wells Fargo analyst Ike Boruchow said in a note to clients last week.
Here’s a list of some battered retailers to watch out for this year. 2020 could be a pivotal moment for them.
Bed Bath & Beyond
Bed Bath & Beyond went through a rocky 2019. But it ended on a high note. The home goods retailer replaced its CEO in May under pressure from an activist investor. Then, after naming an interim replacement, it tapped Target’s chief merchant, Mark Tritton, to take over, beginning in November.
Tritton ousted six senior executives shortly after he arrived, and said: “This is the first in a number of important steps we’re taking.”
On Monday, Bed Bath & Beyond followed up by saying it had completed a real estate deal with an affiliate of Oak Street Real Estate Capital, netting it $250 million in proceeds. It has sold roughly 2.1 million square feet of retail, warehouse and office space to the firm, and will now make rent payments instead of owning the properties. A sale-leaseback deal is often a tactic that companies will deploy when they are in a pinch for cash.
Wall Street is watching to see if Tritton can find a way to compete with the likes of Amazon, Walmart and Target, which sell many of the same goods. One of Tritton’s focuses is expected to be launching more private-label brands.
“Bed Bath was on my ‘watch list’ last year. But they’re not on my list at the moment,” Jan Kniffen, CEO at consulting group J Rogers Kniffen WWE, said in an interview. ”[Tritton] has a lot of runway if he wants to fix Bed Bath.”
Bed Bath & Beyond shares are up about 40% over the past 12 months, trading around $16.70. Shares hit an all-time high of $80.82 on Jan. 3, 2014. The company is valued at $2.1 billion.
Arts and crafts retailer Michael’s is in somewhat of a similar situation as Bed Bath & Beyond, with a new leader coming to the helm and fueling a hope for a turnaround. The company announced two days after Christmas that Walmart executive Ashley Buchanan will become CEO, effective Jan. 6, succeeding Mark Cosby.
Buchanan joined Walmart in 2007 and moved from chief merchandising officer at Sam’s Club to become chief merchandising officer for Walmart’s U.S. e-commerce business, when Walmart shuffled management at its digital business in July.
Michael’s is trying to avoid the fate of rival arts and craft store A.C. Moore, which is in the process of shuttering all of its locations. It could really use some help getting the right products on shelves, analysts have said. The hope is Buchanan can bring what he learned at Walmart over to the craft chain.
“In retailing, one man can make a difference,” Kniffen said about Michael’s new CEO.
Michael’s shares are down about 45% over the past 12 months. The retailer is valued at $1.2 billion.
G-III Apparel Group
Poor performance in North American department stores and pressure on profits has caused investors to flee DKNY owner G-III Apparel Group. G-III Apparel Group shares, which were trading around $33 Monday, are up about 15% from a year ago. But they are still well below a record price above $70 hit back in 2015. The retailer is valued at $1.6 billion.
But Wells Fargo’s Boruchow says there are reasons to be more positive about the company. Its outerwear business appears to be improving, it will benefit from reduced tariffs and is continuing to shutter its unprofitable stores and focus on its wholesale business. These efforts should boost profitability, Boruchow said.
G-III has said one of its top priorities is to close stores. As of Jan. 31, 2019, the company said it operated 139 Wilsons Leather stores, 111 G.H. Bass stores, 42 DKNY stores, 11 Karl Lagerfeld Paris stores and 5 Calvin Klein Performance stores.
Shares of G-III Apparel Group are up about 15% over the past 12 months, trading around $33.30. The stock traded as high as $73.93 in July 2015. The company has a market cap close to $1.6 billion today.
Macy’s, Nordstrom and Kohl’s
Department store chains likely had another disappointing holiday season.
The category of retailers that includes Penney and Macy’s saw overall sales decline 1.8% from Nov. 1 through Dec. 24, according to a study by Mastercard Spending Pulse that tracked retail spending trends across all payment types, including cash and check.
As the narrative builds that consumers are skipping trips to the mall to buy on Amazon instead, and apparel sales are growing at a meager rate compared with other categories, it has dragged department store retailers Macy’s, Nordstrom and Kohl’s down.
But some think this presents a buying opportunity, especially as each of the three retailers is trying a different strategy to boost sales and drive traffic to stores in the New Year. Macy’s is investing in its off-price business, which it says has exceeded expectations in past quarters. Nordstrom is opening smaller-format shops in major cities such as New York and Los Angeles that tout faster delivery. And Kohl’s has a partnership with Amazon to accept Amazon returns in all of its stores, which is expected to be a boon to foot traffic in 2020, now that a fleetwide rollout is complete.
“Macy’s pays a 10% dividend and has great cash flow,” Kniffen said. “Kohl’s ... is not one to go away. Nordstrom is the same. ... And yet nobody wants to own any of them.”
Especially in the coming weeks, as these companies analyze their holiday sales, Wall Street will be watching closely to see which department store operators are shedding more real estate in 2020. Analysts say there are still too many department stores and getting rid of unprofitable locations should help boost these businesses.
Macy’s, with a market cap of $5.3 billion, has watched its stock fall more than 41% over the past 12 months. Nordstrom, which has a market cap of $6.4 billion, has watched its stock drop about 12.5% over the same time period. Kohl’s shares are down about 24% from a year ago, bringing its market value to $7.9 billion.
Victoria’s Secret parent company L Brands just got a sweet upgrade to start the New Year, fueling optimism around the retail stock.
Bath & Body Works is “arguably one of the best stories in retail,” while there is “the potential for stabilization” at Victoria’s Secret, analyst Lorraine Hutchinson said in a note to clients last week. The stock’s rating was lifted to “buy” from “neutral,” and its price target raised to $25 per share from $21. L Brands’ stock, which currently trades at about $18 and has a market value of $5 billion, has fallen nearly 35% over the past 12 months.
Meantime, Wall Street is still waiting to see L Brands’ turnaround plan for Victoria’s Secret, which was laid out at an investor meeting last October, take hold. The head of the lingerie division said the brand would be deploying ways to reconnect with the shoppers it had lost — with new products, new executives and new marketing. That’s one of the main reasons it canceled its annual fashion show, vowing to put marketing dollars elsewhere. But other efforts remain to be seen, analysts say.
Sales at Victoria’s Secret have fallen for the past five years, as women opt for companies that sell bras with more inclusive branding, such as ThirdLove and Adore Me.
“For 3+ years our thesis on L Brands is consistent ... Victoria’s Secret is broken, PINK is broken & Bath and Body Works has now peaked,” Jefferies analyst Randy Konik said following Hutchinson’s note on Friday.