Another one bites the dust. In early September, discount retailer Fred’s (NASDAQ:FRED) announced that it was filing for Chapter 11 bankruptcy protection and shuttering all of its stores. Fred’s joins a long list of retailers that have declared bankruptcy over the past several years as technology has dramatically and irreversibly altered the retail landscape. That list includes once loved retailers like Barneys, Sears and Toys “R” Us, among many, many more.
Over the next several years, this list will only get longer. Looking at the retail scene, while the broad outlook for physical and digital retailers remains positive, there are a handful of retailers out there that are only a few quarters away from shuttering their doors.
These are retailers that were: 1) slow to adapt to the e-commerce shift, 2) have been losing share and relevance for the past few years, 3) are now operating with depleted resources and simply don’t have the financial firepower to make the necessary changes and enhancements to their business to survive, and 4) are holding a huge pile of debt.
Ultimately, if a retailer checks off those four boxes, then that’s probably a retail stock heading for the graveyard — meaning it’s a retail stock you want to sell.
With that in mind, let’s take a look at six retail stocks to sell on their way to bankruptcy.
Retail Stocks to Sell: J.C. Penney (JCP)
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First up, we have forgotten mall retail giant J.C. Penney (NYSE:JCP).
At one point in time, J.C. Penney was at the heart of the American retail landscape, back when consumers did all of their shopping at malls. Times have changed since then. Namely, consumers have migrated to off-mall and online retail channels. J.C. Penney has been slow to adapt to those changes. They didn’t build out an e-commerce business as quickly as they needed to. They didn’t develop omni-channel capabilities as quickly as they needed to. And, they didn’t update their stores or offerings in a way that they needed to.
As such, the once all-important mall retail giant has become largely irrelevant with negative comps and falling margins. J.C. Penney will remain irrelevant for the foreseeable future because this company doesn’t have enough cash (only $175 million in cash on the balance sheet) nor does the business produce enough cash (negative free cash flow year-to-date) to allow management to invest that much — if anything — back into the business.
Further complicating things, there’s over $5 billion in total debt sitting on the balance sheet. Thus, any cash this company does produce is going to have to go towards paying off debt.
There isn’t much to like about JCP here. You have a depressed and forgotten retailer with rapidly depleting resources and a bunch of debt — that combination ultimately implies that bankruptcy is coming soon.
Ascena Retail (ASNA)
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Lesser known than J.C. Penney but in just as much financial trouble, women’s apparel retailer Ascena Retail (NASDAQ:ASNA) could easily wind up bankrupt within the next few quarters.
Ascena is the parent company behind women’s apparel brands like Ann Taylor, LOFT, Lou & Grey, Lane Bryant, Catherines and Justice. Those brands simply aren’t all that important in the modern women’s apparel retail landscape. They aren’t very differentiated and they have a ton of competition. As such, it should be no surprise that over the past several years, Ascena’s comparable sales and margin trends have been sharply negative.
The big problem here — as is the case with J.C. Penney — is that this company doesn’t have the resources to improve its product portfolio. There is only $100 million in cash on the balance sheet against the backdrop of over $1.3 billion in long-term debt. Further, cash flow is negative year-to-date, comps are still negative and gross margins are still dropping. Thus, this company is not nor does it project to produce sizable cash any time soon.
An inability to produce cash plus over $1.3 billion in leverage equals looming bankruptcy. That’s why ASNA stock has been so beaten up, and why it will remain depressed for the foreseeable future.
Stage Stores (SSI)
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Another department store operator which finds itself on this list of retail stocks on the verge of bankruptcy is Stage Stores (NYSE:SSI).
The story at Stage Stores is very similar to the stories at J.C. Penney and Ascena. Broadly speaking, you have a retailer that accumulated a lot of debt to fuel expansion during its growth years. But, e-commerce disruption ended SSI’s growth years, and because the company has failed to adapt its operations in a meaningful way to the e-commerce disruption, sales and profit trends have been hugely negative for several years. Now, SSI is left with largely depleted resources (only $25 million in cash), a still big debt load (over $675 million) and very little visibility to produce enough cash to service the debt load.
To be sure, comps here are positive — a rarity on this list — as Stage Stories is trying to survive by converting its full-price department stores into more popular off-price discount stores. This transition has potential. But, margins are still dropping, EBITDA is still falling and cash flows are still negative. Plus, off-price stores don’t always work out, either — just ask Fred’s.
Thus, this move may be too little, too late. Ultimately, it does appear that despite this smart off-price pivot, the ultimate outcome here is for Stage Stores to end up in the retail graveyard.
Big 5 Sporting Goods (BGFV)
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The sporting goods sector has had its fair share of bankruptcies over the past several years, and the industry may get another bankruptcy soon with Big 5 Sporting Goods (NASDAQ:BGFV).
In the big picture, the sporting goods sector got too big to be sustainable. That is, now that Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN) and Target (NYSE:TGT) all sell a ton of sporting goods equipment, the market doesn’t need a dozen sporting goods department stores anymore. It only needs one or two — meaning that this market is consolidating around a handful of larger players. Big Five simply isn’t one of those players, and as such, it’s tough to see there being enough room in the market for Big Five to stay around for much longer.
The financials here aren’t pretty, either. Big Five has a ton of debt — about $350 million in debt and operating lease liabilities. Meanwhile, there’s only $6.6 million in cash on the balance sheet. Cash flows haven’t been consistently positive for about a decade, and the outlook remains dim for them to be consistently positive anytime soon. Comps are positive, but gross margins and profits are still dropping as discounting appears to be driving the positive comps.
There’s not much to like here. The sporting goods sector is consolidating, and that consolidation is squeezing out Big 5, who — with only $6 million in cash left against nearly $350 million in debt — seems to be on the verge of the bankruptcy.
Pier 1 (PIR)
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Next up, we have struggling furniture retailer Pier 1 (NYSE:PIR), who checks off all the boxes of a retail company on the verge of bankruptcy.
Limited resources? Check. Pier 1 only has $30.5 million in cash on the balance sheet. Tons of debt? Check. Against that tiny $30.5 million cash balance, Pier 1 has $950 million in total debt on the balance sheet. Negative sales trends? Check. Comparable sales dropped 13.5% last quarter. Sales dropped 15.5%. Retreating margins? Check. Gross margins dropped over 700 basis points last quarter, and operating losses widened. Negative cash flows? Check. Cash flows have turned sharply negative this year, and there isn’t much visibility for them to turn back into positive territory anytime soon, if ever.
Zooming out, Pier 1 has struggled as e-furniture retailers like Wayfair (NYSE:W) have jumped onto the scene and stolen market share. The big problem? E-commerce penetration rates in furniture retail are around 13%, versus roughly 30% for apparel and consumer electronics. Thus, the e-commerce disruption problem for Pier 1 will only get bigger and bigger over time. As it does get bigger, things will only get worse. Sales will keep dropping, margins will keep retreating, losses will widen, and eventually, the company simply won’t have enough financial firepower to service its near $1 billion in debt.
PIR stock may not be around for much longer.
Bed Bath & Beyond (BBBY)
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The story at Bed Bath & Beyond (NASDAQ:BBBY) is very similar to the story at Pier 1.
Big picture, both are struggling home goods and furniture retailers which are being squeezed out of the market. When it comes to Bed Bath & Beyond, there are two things at play here. One, the mainstream emergence of e-furniture retailer players like Wayfair has pulled customers away from BBBY stores. Two, the expansion of big box retailers like Amazon, Walmart and Target into the home goods and furniture game has eroded BBBY’s differentiation in a very crowded retail marketplace.
The result? Many consumers have left Bed Bath & Beyond stores, and unless the company runs huge discounts (which would kill margins and lead to huge losses), those churned customers don’t have much reason to go back.
That’s why comps and sales trends have been, are and will remain negative. Same with margin and profit trends. It doesn’t help that cash and cash flows are limited, and that the debt load is enormous.
Overall, it seems like Bed Bath & Beyond is doomed for a similar fate as Pier 1.
As of this writing, Luke Lango was long TGT and W.