Retailers To Avoid Or Sell: L Brands And Nordstrom
- L Brands and Nordstrom have been hit hard by store closures related to COVID-19 quarantines.
- Both companies had weak balance sheets going into 2020, and may have to issue material debt and/or equity to stay afloat.
- Extended sales and consumer spending issues caused by the coronavirus recession will be problematic for their common equity values.
L Brands (LB) and Nordstrom (JWN) are the worst-performing blue-chip retailers in my computer momentum screens at the end of April. Both have operations heavily hit by government-mandated quarantine shutdowns at your local mall location, from the coronavirus pandemic. While each has some online sales presence, most customers like to browse the stores, smelling the fragrances at Bath & Body Works, and trying on clothing for the right fit and fashion at Victoria’s Secret or Nordstrom.
You can see a big performance difference in the last three months between the companies with stores still open vs. those that have been forced to close. Had you invested $10,000 in each, a real dichotomy is pictured below between fellow S&P 500 retailers and competitors Kohl’s (KSS), The GAP (GPS), Walmart (WMT), Target (TGT) and Amazon (AMZN).
Using long-term analysis, the 3-year chart below highlights the real underperformance of L Brands and Nordstrom against the same peer group, again investing a $10,000 sum in each. If consumer preference trends continue to favor online retail sales vs. brick-and-mortar locations, the two companies are in a tough spot.
L Brands’ planned sale of a majority stake in Victoria’s Secret to Sycamore Partners may fall apart. Sycamore is claiming breach of contract in its notice dated April 22, after physical locations were forced to close across America. L Brands could have used the $525 million in proceeds to pay down $5.5 billion in long-term debt. The truly bad news is the retailer held a negative tangible book value of -$2.5 billion at the end of December, from major write-downs in assets during 2018-19. An almost unheard of lack of hard asset backing for a retailer dependent on ever-changing consumer tastes, the 2020 business shutdown could not have come at a worse time.
The coronavirus shutdowns may cause hundreds of millions in operating losses this year, and take away billions in estimated future revenues annually if the economy does not recover quickly. L Brands reported a -$2.1 deficit on the retained earnings line of its 2019 10-K balance sheet, meaning it really has not been profitable as a company over its business life cycle (L Brands has failed to generate any income in total since inception as a company). Reviewing the entire picture, today’s market cap of $3.3 billion at a $12 share price may still be an optimistic Wall Street take of the L Brands investment story.
Below is a 12-month price chart of the L Brands ownership picture. The green circle of the 14-day Relative Strength Index (RSI) reading near 50 signals the oversold condition in March has been worked off. It is entirely possible, a pick-up in coronavirus cases in May-June from reopening the economy may work in reverse for brick-and-mortar retail profitability. Another wave of scare means consumers will likely stay away, even if store doors are open. Sales may not recover as optimists now predict, while the cost to keep stores open is high.
The red arrow points to a Negative Volume Index (NVI) moving in the wrong direction. Since late February, buyers have been absent, net-net on falling volume days. Often, smart buying on weakness trends are evident in the NVI. That’s not the case for L Brands. Additionally, the blue arrow points to truly rotten activity in the On Balance Volume (OBV) indicator. Finally, the 33% price drop since January 1st compares to a 13% decline in the S&P 500 (not pictured). In combination, lagging relative strength and weak volume accumulation trends are areas of the market to avoid, if you have a choice.
Nordstrom is in a similar fundamental and technical position. However, its larger store locations require higher rent payments when they are shuttered and much greater logistical effort to close and restart sales. The company’s 10-K for last year reported a whopping $9.3 billion in contractual obligations in total (including debts, purchase obligations and operating leases), with a minimum of $2 billion due in 2020. Similar to L Brands, the company barely has as many identifiable real-world assets to offset the $9+ billion in liabilities. Believe it or not, Nordstrom also has a negative -$2 billion in retained earnings over the life of the business.
Plus, Nordstrom is expected to lose several hundred million more in 2020, using current optimistic Wall Street analyst consensus assumptions. If the economy remains in the doldrums for years, and sales do not recover robustly, income will be flat to negative each month. Can the company pay its bills without issuing more debt or issuing dilutive equity? It’s an open question, with answers bullish investors may not like.
At an $18 share price, the company’s ownership interests are still valued at $2.8 billion. Considering unemployment is above 20% in early May, and consumer confidence has been shattered, it’s not a shock to see continued liquidations of Nordstrom’s stock. Below is a 12-month price chart for Nordstrom with the same momentum indicators as the L Brands picture.
The green circle of the latest RSI number highlights Nordstrom could be positioned for another sell wave lower in price. The red arrow points to a terrible-looking NVI indicator since February, and the blue arrow marks the weak OBV situation. The stock is down a monster -55% since the beginning of January against a -13% S&P 500 price decline (not pictured). Putting all the pieces together, including many indicators not discussed, Nordstrom may continue to underperform the market going forward.
If you are reviewing which retail stocks to sell or avoid because of the coronavirus situation, L Brands and Nordstrom should be near the top of your list. Companies dependent on physical locations for sales have experienced growth issues for many years. The winners in retail have been hybrid retailers with a strong online presence leveraged with in-store pickup like Target (TGT) and Walmart (WMT), or online only outlets like Amazon (AMZN). The coronavirus pandemic has added a new layer of issues for retailers with a mall location focus for sales.
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