February retail sales rose 0.6% from the previous month, despite higher consumer prices, indicating positive consumer sentiment. In addition, the Federal Reserve signaled plans to cut interest rates three times in 2024, potentially leaving consumers with more disposable income. Plus, the strong job market and rising wages are also supporting consumer spending. Despite these signs, there are some retail stocks to sell. These companies are struggling businesses, and it’s unclear if they will have a way forward.
At the moment, investors can incur a significant opportunity cost if they hold on to these retail stocks to sell. The underlying economic conditions supporting consumer spending appear accretive for certain retailers to outperform, so investors may miss out on gains by waiting on the sidelines instead of establishing positions in promising companies.
Here are three retail stocks to sell now.
Lovesac (LOVE)
Lovesac (NASDAQ:LOVE) is known for its innovative modular furniture and adhering to environmental, social, and governance (ESG) principles.
For fiscal 2023, LOVE reported significant growth with a 30.8% increase in net sales. That was driven by expansion across all channels, including showroom net sales up by 33.3%, Internet net sales up by 17.2%, and other channels up by 57.3%. However, gross margins decreased to 53.1% from 54.9% in fiscal 2022. All thanks to increased freight, including tariff expenses and warehousing costs.
Despite scaling revenues year over year, the problem for LOVE seems to be that it has been unable to improve its margins, with its free cash flow and return on equity being negative for the past five financial years.
There doesn’t seem to be much room or hope in my opinion for its FCF to turn around, due to its small operating margin, which has hovered around the 5% market over the years. Therefore, the more revenue LOVE records, the wider its losses are, with an average FCF margin of around negative 7%.
Etsy (ETSY)
Etsy (NASDAQ:ETSY) has carved out a niche in the online retail market with its unique handmade and vintage items. It’s a niche or hipster version of Amazon (NASDAQ:AMZN).
I don’t think ETSY has an accretive future. Just like as with other e-commerce stocks, it peaked during COVID, and its growth has been relatively flat over the past three years. These years were also marked with leaps and dips in its EPS, with the company seemingly unable to increase it consistently.
ETSY’s EPS in 2022 for instance was negative -5.48, while last year it was 2.24. COVID may have very well skewed the average of what we can expect from the business, as its EPS before the event was around 0.68 on average.
Furthermore, its valuation is rather expensive relative to its expected growth rate, trading at 30 times earnings, while its top-line is expected to only increase by 5%. There are better options out there in the e-commerce world, such as AMZN.
Express (EXPR)
Express (OTCMKTS:EXPR) is a fashion retailer. And unfortunately, there are fears that it’s about to file for bankruptcy, as Investorplace reported previously.
Either way, the firm is on its last legs. Over the past 52 months, its valuation has cratered over 90%, and 19.11% of its float its being sold short. The market then is pricing in a strong downwards move, despite it trading at just $1.4 per share at the time of writing.
EXPR’s problems stem from its high debt load and negative free cash flow. Its liquidity, calculated from its total debt and cash equivalents, is negative—$226.07 per share. Year to date, it burned through $238.90 million worth of cash and has just around $34 million remaining.
Holding on EXPR shares is extremely risky. Dumping them could be a wise choice, as it seems likely that one could lose their entire investment.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.