Retail is a dynamic world, and the winds of change are ever-present. The sector has historically been a barometer of economic health and consumer confidence. But recent years have seen a more complex landscape emerge. A combination of changing consumer behaviors, the rapid rise of eCommerce and global economic challenges have led to underperforming retail stocks for August gasping for air. Ultimately, only companies able to adapt to changing conditions can be successful, no matter how long a legacy they have.
As recession fears abate, retail has begun to rebound. The SPDR S&P Retail ETF (NYSEARCA:XRT) is up 4% since January despite a recent August dip alongside the broader market. Still, these three stocks struggle to regain momentum, proving they don’t have what it takes to compete in today’s complex retail environment.
International Flavors & Fragrances (IFF)
International Flavors & Fragrances (NYSE:IFF) is the worst-performing stock on the S&P 500 index, and recent moves prove it may not have what it takes to rebound. At the beginning of the month, the company published a downward revision of annual sales projection based on dwindling customer demand.
IFF dropped its annual sales forecast to a range of $11.3 billion to $11.6 billion, marking a sharp deviation from its earlier projection at $12.3 billion. Likewise, the company’s anticipated adjusted EBITDA for 2023 sits between $1.85 billion and $2 billion. That’s a substantial dip in management expectations from the previously estimated $2.34 billion.
This marks the third time IFF has scaled back its 2023 forecast since its investor meeting in December 2022. IFF’s second-quarter earnings were reported at 86 cents per share with a revenue of $2.93 billion. For perspective, IFF’s earnings during the same quarter the previous year stood at $1.54 per share on revenue of $3.31 billion.
At the same time, IFF is assuming increased debt to fuel basic operations in place of revenue. Taking on debt to compensate for poor sales is a sign of troubling times. This retail stock may not emerge from its current predicament unscathed.
Estee Lauder (EL)
IFF isn’t the only boutique retail loser. Estee Lauder (NYSE:EL) fell sharply this week after a similar earnings report and forecast that didn’t meet analysts’ mark. On the call, management blamed global demand falling for their trimmed forecast. Specifically, they highlighted that the “global travel retail business saw a 34% organic drop in 2023, predominantly due to the Asian travel retail segment.” This slump beat down the company’s skincare segment, a high-margin income driver for the company.
Surprisingly, many analysts didn’t seem phased by the long-term pessimism. TipRanks reports the median analyst forecast at $192, which is almost 30% higher than today’s pricing. But with Asian economies struggling and continued economic unease at home, this retail stock’s long-term outlook isn’t bright.
Walgreens (WBA)
Walgreens (NASDAQ:WBA) is another struggling retail stock, and the company plans to shutter 150 US-based locations and 300 in the UK. Mass divestiture of retail outlets is rarely a good indicator of company health. True to form, the mass closure may prove a warning sign that this stock is on its way out.
Today, its cash flow isn’t sufficient to fund its primary care venture, cover dividend payments, and reduce its debt at the same time. In its recent report, the company’s cash burn included $5.2 billion in debt payment, $1.6 billion in capital expenditures, and another $1.2 billion in dividends. That isn’t sustainable.
So, at the same time the company closes sales locations, it’s selling off assets to raise cash. Walgreens resorted to selling off its investment in AmerisourceBergen (NYSE:ABC) to bolster its cash position. Again, rapid divestiture of held assets isn’t good and indicates Walgreens can’t manage its finances. Dividends may be next on the chopping block. Its current distribution yield is 6.28%, which helped maintain investor interest thus far. The company may next be forced to divert earnings from distributions. If that happens, it may be the final nail in the retail stock’s coffin.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
