Number Cruncher Extra

7 Consumer Discretionary Companies that Might not Survive the COVID-19 Bear Market

WHAT ARE WE LOOKING FOR?

The S&P500 is down 22.97%, the S&P/TSX is down 24.18% year to date. The COVID19 pandemic is destroying the economy, the Canadian GDP and US GDP are expected to drop significantly. Many businesses are shutting down and laying off employees. Although both the US and Canadian governments are putting in place subsidy programs to support businesses, some of them might not survive this crisis.

Today we will be looking at unprofitable companies with substantial debt on their balance sheet that might not survive the crisis:

 

THE SCREEN

We are looking at North American companies with the following criteria:

  • Long term debt to equity of at least 2. This indicate that the company is highly leveraged and might have a hard time paying back their debt during the crisis
  • Decreasing sales growth over the last 24 months. This indicate that the company was already having trouble before the crisis
  • We are looking for companies with decreasing NOPAT over the last 2 years. This indicate that the company is decreasing the shareholders net pay.
  • A negative EPI: The economic performance index (EPI) is the main indicator to identify how much wealth is redistributed to the shareholders. The higher the better, and a negative EPI means that the company is not covering its costs of capital.
  • Sector: Consumer Discretionary. This sector might be the most impact as consumers will reduce their spending, especially for non-essential products

 

For informational purposes, we have also included recent stock price, dividend and one-year return. Please note that some ratios may be reported at the end of the previous quarter.

 

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TICKER COMAPNY RECENT PRICE ($) MKT CAP ($MIL.) LT DEBT SALES CHG. 24M (%) NOPAT CHG. 24M (%) EPI NOPAT LT DEBT / EQUITY DIV. YIELD (%) 1YR PRICE RTN.(%) SECTOR
ASNA-Q Ascena Retail Group, Inc. 0.91 9.08 1924.20 -19.87 -8.45 -1.00 -211.16 211.92 0.00 -93.56 Consumer Discretionary – Retailing
PRTY-N Party City Holdco, Inc. 0.31 28.95 2224.72 -0.96 -16.15 -0.23 -40.55 76.85 0.00 -94.23 Consumer Discretionary – Consumer Durables And Apparel
JCP-N J. C. Penney Company, Inc. 0.27 87.29 4682.00 -10.71 -6.05 -0.03 -12.52 53.64 0.00 -75.84 Consumer Discretionary – Retailing
BBBY-Q Bed Bath & Beyond Inc. 3.94 485.01 3341.41 -6.64 -16.56 -0.19 -75.29 6.89 4.60 -75.22 Consumer Discretionary – Consumer Durables And Apparel
ADNT-N Adient Plc 7.35 688.70 4004.00 -0.66 -11.49 -0.03 -22.13 5.81 0.00 -30.02 Consumer Discretionary – Automobiles and Components
GME-N Gamestop Corp. Class A 2.80 183.40 949.10 -29.90 -35.78 -0.63 -132.84 5.18 0.00 -65.55 Consumer Discretionary – Consumer Durables And Apparel
HMHC-Q Houghton Mifflin Harcourt Co 1.52 189.00 773.18 -1.20 -9.28 -0.51 -89.98 4.09 0.00 -74.14 Consumer Discretionary – Hotels and Leisure

WHAT WE FOUND

Bed Bath & Beyond Inc’s stock is down 90.8% since January 2017 and 68.35% since the start of the pandemic bear market (21 February 2020). With a Long-term debt to equity ratio of 6.25, a decrease in net income in the last 5 years from $957M in 2015 to -137M in 2019, there is a lot of question marks regarding the future performance of the companyWith a long-term debt to equity ratio of 40, J.C. Penney has temporarily furloughed most of their 85,000 employees, including store hourly workers and many corporate staff members. 57% of their revenue depend on their apparels and accessories sales, this will directly affect their earning next quarter, as apparels and accessories are considered non-essential products. The company wasn’t performing well even before COVID19 as the stock is down 96% since 2017.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more information about these stocks, readers can subscribe to the Investor for Advisor platform for free: https://www.inovestor.com/en-CA/store/
The screener is available here for investors with an Inovestor for Advisor account. The debt-to-equity ratio has been calculated manually.

 

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