Student loan repayments resume on Oct. 1 after a three-year hiatus due to Covid-19. The repayments on the $1.6 trillion in student loan debt are bound to affect retail spending and, in turn, retail stocks.
The question economists are trying to answer is how much of an effect payment resumption will have on curbing consumer spending. According to Bloomberg, the estimates range from $70 billion to $108 billion ($9 billion monthly).
One company that believes the resumption of student loan repayments has already bitten into its sales is Bath & Body Works (NYSE:BBWI). At an investment conference in mid-September, its CEO, Gina Boswell, said that this reality played a part in the company’s sluggish sales.
There will be retail winners and losers from the student debt repayment resumption.
BBWI is one company that could suffer from reduced spending. Here are three other retail stocks to sell before the payment effect starts to kick in.
Victoria’s Secret (VSCO)
Investors need to remember why the separation was done in the first place: The lingerie business was hemorrhaging sales. Since 2018, according to Bloomberg, it’s lost $1.8 billion in sales.
The company reported its Q2 2023 results at the end of August. On the top line, its sales were $1.43 billion, identical to the analyst estimate but 6.2% lower than Q2 2022. In addition, its same-store sales were down 11% in the quarter. That’s on top of an 8% decline in Q2 2022.
On the bottom line, its adjusted earnings per share were 24 cents, 3 cents shy of the consensus, and 85 cents lower than its EPS a year ago.
In 2023, Victoria’s Secret expects sales to fall in the low-single digits over last year, with an adjusted operating margin of 5.5% at the midpoint of its guidance. A decade ago, the lingerie business had an 18.1% operating margin, more than 3x today’s.
I find it hard to believe that things will get better when a chunk of its customers have less disposable income when it is already struggling to get people in the door.
This could be under $10 by Christmas.
Let me see. What am I going to do? Pay my student loans or buy a video game from GameStop (NYSE:GME)? At least a case can be made that bras and panties are necessities.
Keith Gill, the YouTuber who initially invested $53,000 of his life savings in GME stock at $5 per share in 2019, has disappeared into the ether, not to have been heard from since April 2021. At the height of GameStop’s pandemic-induced frenzy, his holdings were valued at nearly $50 million.
At its peak in January 2021, GME stock was $483. It has lost 97% of its value in the 32 months since.
If he were smart, he’s long since sold his stock, paid his capital gains, and moved on.
The company reported its Q2 2023 results on Sept. 6 and were better than expected.
On the bottom line, it lost 3 cents a share, 11 cents better than the analyst estimate. On the top line, its sales were $1.16 billion, $20 million higher than the consensus. The company kept its loss to 3 cents by cutting its operating expenses to 27.7% of its net sales, 640 basis points lower than Q2 2022.
Despite beating on both the top and bottom line, its shares are down more than $2 since it reported its quarterly results on Sept. 6.
As of July 29, it had cash, cash equivalents and marketable securities of $1.20 billion. Its Q2 2023 press release asserted that its “long-term debt remains limited to one low-interest, unsecured term loan associated with the French government’s response to COVID-19.”
That’s true. However, it doesn’t say its net cash would be just $560 million after accounting for short- and long-term debt and operating lease liabilities.
So, that’s just $1.84 a share in net cash supporting its share price. Subtract the net cash from its share price, and the market capitalization is $4.55 billion on no growth, no prospect of growth and ongoing quarterly losses.
Between VSCO and GME, GME is the one that truly deserves to be sub-$10 — time to dump this turd.
Abercrombie & Fitch (ANF)
Abercrombie & Fitch (NYSE:ANF) stock is up 124% YTD. It is the new “it” retailer. Back in October 2021, I recommended ANF and nine other cyclical stocks to buy after the correction that year. The shares are up 248% in the two years since.
While business is good, I have to wonder if the focus of its Abercrombie brand on customers between 25 and 34 — millennials accounted for 45% of the brand’s overall sales — won’t hurt it moving forward under the economic cloud of student loan repayments. Add in Hollister’s 25 to 34-year-old customer base (16% of the brand’s revenue), and millennials accounted for approximately 30% of its Q2 2023 sales.
According to data from EducationData.org, most federal student loan debt is held by people 25 to 34. If this cohort stops spending on Abercrombie clothing, its shareholders can kiss 13% same-store sales growth goodbye.
Of the three stocks, ANF is the one I’m most divided about.
Clothing isn’t something you can go without. However, it is possible to reduce how much you spend on clothing. People with student debt could spend more time at discounters like TJX (NYSE:TJX) or even second-hand stores such as Savers Value Village (NYSE:SVV).
It might not take as big a hit as VSCO or GME, but I can’t see its sales not retreating if the high-end economist estimates on the impact on the economy are anywhere near accurate.
On the date of publication, Will Ashworth did not hold (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.