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December 2019

Retailers that are no Christmas Gifts

What we are looking for?

With Black Friday still fresh in our minds we decided to look at North American retailers that may look tempting based on yield but that face deteriorating economics. More precisely we selected dividend-paying stocks and we screened them based profitability trends and other fundamental quality criteria.


The screen

We screened for consumer discretionary stocks based in North America, specifically, those stocks listed in the subsectors of retailing or consumer durables and apparel. We then added the following criteria:

  • A market capitalization greater than US$1-billion;
  • Stocks must pay a dividend;
  • Return on capital (ROC) of less than 10 per cent in the past 12 months;
  • Declining ROC over the past 24 months;
  • Negative stock price change over the last 12 months;
  • Declining economic value-added (EVA) per share over the past 12 months.
  • Declining sales in the last 12 months.


What we found

There are four retailer stocks that meet our criteria in the North American markets. All are U.S.-based brick and mortar retailers: Children’s Place Inc., Bed Bath & Beyond Inc., Gap Inc. and Macy’s Inc. The Children’s Place operates as a children’s specialty apparel retailer with its network of speciality stores. Bed Bath & Beyond operates retail stores that sells domestics merchandise, including bed linens, bath items, kitchen textiles; and home furnishings products. The Gap operates outlets under the Old Navy, Gap, Banana Republic, and other brands. Macys operates department stores under the Macy’s and Bloomingdale’s names as well as a network specialty stores. The reality is that these four retailers are under pressure as online retailers continue gaining market shares.

Topping our list, ranked by dividend yield, is Macy’s. The stock is currently yielding 9.9 per cent. While providing an eye-popping payout, Macy’s is facing profitability challenges as measured by ROC and EVA measures. It is also experiencing declining sales. It will be hard for its board to keep paying this dividend to shareholders unless management succeed in turning around the economics of the business. Given how badly a stock price can react when shareholders are faced with a dividend cut, it’s better to avoid such stocks even if, at first sight, the yield looks attractive.

Investors are advised to do further research before investing in any of the companies shown here.

Ticker Name Price MarketCap Div Yield R/C R/C Ch. 24M Price Var. 12M EVA Ch. 12M Sales Ch. 12M
BBBY Bed Bath & Beyond $         14.58 $1.9B 4.60% -0.64% -11.22% -0.29% -831.39% -5.88%
PLCE Children’s Place $         72.26 $1.1B 3.10% 8.67% -3.59% -45.17% -26.25% -3.04%
GPS Gap, Inc $         16.61 $6.3B 5.84% 9.53% -1.26% -40.44% -101.16% -2.41%
M Macy’s Inc $         15.32 $4.8B 9.86% 6.16% -0.42% -55.79% -441.94% -1.02%

Christian Godin is a portfolio manager at Inovestor Asset Management.

Portfolio Manager’s December comment For November Results

The Canadian stock market realised another month of positive returns in November. This positive outcome unfolded as reported quarterly results were coming in line with investors expectations and in a context of diminishing international trade tensions.

The S&P/TSX Total Return Index rose by 3.6% in November and the S&P 500 also rose by 3.6% while the MSCI World produced a 0.9% positive return. At November end, the 12-months S&P/TSX Total Return Index gain was 15.7% nearly in line with the S&P500 gain of 16.1% and higher than the MSCI World 12-month increase of 11.8%.
The best TSX sector for the month of November was Information Technology up 8.6%, followed by Consumer Staples up 5.8%, and Consumer Discretionary up 5.5%. On the contrary, the worst performing sectors were Health Care (-2.8%), Real Estate (-1.0%) and Material down (0.1%).

Looking more specifically at INOC, the fund was up 5.4% and the best performers in November were Gildan Activewear (+16.4%) the t-shirt manufacturer, Parex Energy (10.1%) an oil producer with assets in Colombia, and Alimentation Couche-Tard. (+10.0%), the Canadian convenience store operator with a global footprint.
On the contrary, the weakest contributor to INOC was Norbord, which was down 4.1%, on after a strong showing in October. The negative contributors were Equitable down 4.1% and TD Bank down 1.8%. All the other constituents of INOC had a positive performance for the month of November.