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Retailers To Avoid Or Sell: L Brands And Nordstrom

May 04, 2020 12:31 PM ETJWN, BBWI3 Comments
Paul Franke profile picture
Paul Franke
20.27K Followers

Summary

  • 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

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

This article was written by

Paul Franke profile picture
20.27K Followers
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 36 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of April 2023, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

Analyst’s Disclosure: I am/we are short LB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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