7 Retail Stocks to Skip as Shoppers Pull back on Spending

These days, the U.S. economy isn’t looking so hot. Inflation is still red-hot. The Federal Reserve will more than likely keep its foot on the gas with interest rates. And more than half of Americans are now forced to live paycheck to paycheck. So, it comes as no real surprise that companies, like Walmart, sounded the alarm. Granted, the retail behemoth reported strong top and bottom-line growth in its most recent quarter, but it also warned shoppers are feeling the squeeze of higher prices. With many retailers seeing much of the same, investors may want to consider these top retail stocks to sell immediately.

Retail Stocks to Sell: Blue Apron (APRN)

Meal-kit delivery service provider Blue Apron’s (NYSE:APRN) narrative was a hit during the pandemic. However, with consumers cutting back on discretionary spending, its meal kits are something of a luxury. At this point, it’s essentially survival mode for the firm as it looks to cut costs and strengthen its liquidity positioning. Revenue growth has been flat in the past few quarters, while its operating income remains firmly in the negative. It recently announced a 10% reduction of its workforce to cut costs as it looks to slash expenses by $50 million this year. Its total debt load is more than two times its cash balance which spells long-term trouble for the firm.

Retail Stocks to Sell: Destination XL Group (DXLG)

Destination XL Group (NASDAQ:DXLG) is a leading American apparel retailer specializing in men’s clothing for plus sizes. It boasts a presence in 46 states across the U.S., managing 287 stores. Overall there’s a lot to like about the company. After all, it’s been generating record sales and earnings while its stock price jumped remarkably well in a volatile economic environment.

However, despite the positives, I’m taking a contrarian view of the stock on the underlying quality of its bottom line. Operating margins for the firm have been inconsistent, which is an important metric for a slow-growing business such as DXLG. Revenue growth over the past year has been 4.4%, far behind the sector average. Moreover, its 5-year average operating margin is at a negative 0.26%.

Additionally, its high and low operating margins have been a healthy discrepancy over the past decade. Its 10-year operating margin high is at 11.8%, while its 10-year operating margin low is at a negative 14.3%, indicating the massive fluctuation. Moreover, retained earnings for the firm are at a negative $83 million, which indicates that the company cannot effectively reinvest its profits.

Retail Stocks to Sell: Peloton (PTON)

Peloton (NASDAQ:PTON) made a fortune selling its fitness bikes during the pandemic. Consequently, it doubled its profits on record sales in the first few quarters of 2020. However, its business is in the doldrums with rising inflationary pressures and the pandemic fade. It’s been generating negative revenue growth, and it managed to burn through $34 million in the second quarter, with $2.3 billion in debt on hand. Granted, the company made headlines this year, with its stock doubling in price from Dec. to early Feb. thanks to strong holiday sales. However, the one-off that was its holiday promotion is unlikely to have a major long-term impact on its stock.

American Eagle Outfitters (AEO)

American Eagle Outfitters (NYSE:AEO) is a leading specialty retailer of clothing, accessories, and personal care products. The company has been a sluggish performer in the past year, with lackluster improvements in its top and bottom line. Revenues have been growing at a lethargic pace compared to sector averages, while EBITDA growth remains firmly in the negative at 40.7% for the year.

Moreover, over the past five years, the firm’s return on equity (ROE) has been dwindling at an accelerated pace. Its ROE is down 8% compared to its 5-year median. Also, its inventory position is a major worry for the business. Its inventory days figure is at 77 days, compared to 57 days (its 10-year median). With sales largely unchanged and the inefficiencies in inventory management, I expect the business to continue eroding shareholder value.

Wayfair (W)

Online furniture retailer Wayfair (NYSE:W) was a popular pandemic stock that saw impressive growth during the pandemic years. Unfortunately, the party’s over for the stock. Revenue growth has stalled for the company, which isn’t surprising given the current housing market conditions. In fact, according to the National Association of Realtors, home sales were down 34% last year, which points to the massive erosion of the real estate market. Naturally, the sordid position of the real estate sector will have a crippling impact on Wayfair’s business and its stock.

In addition, Wayfair’s active customer base is down significantly, with the company posting a larger-than-expected loss in its fourth quarter. Moreover, with it laying off more than 1,750 workers, expect similar results to follow in the upcoming quarters.

Rite Aid (RAD)

Rite Aid (NYSE:RAD)  margins have been lackluster, to say the least, with EBIT margins at just 0.7% over the past five years. As we advance, it expects to lose $584 million in fiscal 2023, closing 145 stores last year. It will likely close more stores this year and lose more money due to lower pharmacy margins resulting in a weaker adjusted EBITDA. Moreover, it plans to spend more than $200 million to advance its digital transformation efforts, which further weighs down its bottom line and liquidity.

Party City (PRTYQ)

Party Supplies Retailer Party City (OTCMKTS:PRTYQ) rode the meme stock furor, which kept it relevant among retail traders. However, the inevitable happened with the firm, as it recently filed for Chapter 11 bankruptcy protection. The firm has $1 billion in assets and $10 billion in liabilities, with its restructuring expected to be complete by the second quarter of this year. After the announcement, PRTY stock spiked 10% in value, essentially a flash in the pan.

Unfortunately for the company, it failed to rebound from the coronavirus-led shutdowns. Its entire business was built on enabling people to celebrate big and small occasions in person rather than online. Therefore, as our resident expert Louis Navellier says, “It’s time to turn the lights out on this party and tell investors to go home.”

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.