7 Retail Stocks That Are Far Too Close to Failing

2020 was a tough year for retail stores. The coronavirus pandemic resulted in lockdowns and closures, and accelerated the move to online shopping. A large number of retailers, including iconic chains like Pier 1 Imports, went bankrupt. Some retail stocks posted significant gains in 2020, but they may not be in the same position in 2021…

In fact, some retail stocks are far too close to failing. The companies on this list might fool you at a glance. Some have seen their share post impressive gains over the past year. But the best of the bunch earns a dismal ‘D’ rating in Portfolio Grader: 

  • AutoZone (NYSE:AZO)
  • Burlington Stores (NYSE:BURL)
  • CVS (NYSE:CVS)
  • Home Depot (NYSE:HD)
  • O’Reilly Automotive (NASDAQ:ORLY)
  • Ross Stores (NASDAQ:ROST)
  • TJX Companies (NYSE:TJX) 

If you’re looking for growth stocks for your portfolio, I have many suggestions. Here’s a list of triple-A-rated stocks, for example. And there are some retail stocks that are well positioned for growth, but you’ll note the companies are heavily weighted toward e-commerce players. The retail stocks on this particular list are risky, for a variety of reasons that I’ll go into.

Retail Stocks to Avoid: AutoZone (AZO)

Founded in 1979, AutoZone is the largest U.S. retailer of aftermarket automotive parts and accessories. Over the past five years, AZO stock has returned gains of 65%. That’s due in part to the fact that Americans are holding onto their cars longer than ever, which means more parts and maintenance items are required. But there are dark clouds on the horizon that threaten this retail stock.

There’s the omnipresent risk of Amazon (NASDAQ:AMZN). The e-commerce giant may not expand into car parts, but it certainly has no issue competing against AutoZone by selling automotive accessories.

The real danger for AutoZone lies in demographics. Millennials and Gen Z are showing far less interest in owning a car than older generations. Instead, they’re happy to use ride-share services. That’s a problem for car manufacturers, but fewer cars on the road also means fewer replacement parts required.

In addition, the popularity of electric cars is on the rise. One of the selling points of EVs is lower maintenance costs. They have fewer moving parts than gas-powered cars, and don’t require engine oil. That’s more bad news for a retailer like AutoZone.

After nearly 20 years in growth mode, AZO stock has plateaued over the past two years. The future doesn’t look promising given the headwinds this company faces.

Burlington Stores (BURL)

With the pandemic in 2020, retail stores were closed for lockdowns. After re-opening, many locations faced limitations on operating hours and the number of customers in a store.

That drove many brick-and-mortar retailers to scramble to create a website in order to survive. With online shopping receiving what is expected to be a permanent boost from the pandemic, having a strong e-commerce presence is seen as being a key to survival for retailers.

That makes Burlington Stores’ 2020 move a head-scratcher. The operator of discount clothing stores announced in March that it was shutting down its e-commerce operations. The company ditched online sales so it could focus on bargain shoppers. The company also announced plans to open up additional outlets.

The move paid off in the short term. BURL stock is up 132% over the past 12 months.

However, abandoning online shopping is going to hurt this retail stock in the long term. Adding to the risk, Burlington Stores’ early attempt at e-commerce fell flat. Online only accounted for 0.5% of the retailer’s sales before it was shut down. That does not bode well for the company’s odds for success when the growing consumer preference for online shopping forces it to attempt a pivot back to e-commerce.

CVS (CVS)

CVS stock has put together 12-month growth of 44%, and that may fool you into thinking this is a solid, long-term growth retail stock. It’s not. Prior to 2020, CVS shares had been on a roller coaster, but trending down for the past five years.  

The largest retail pharmacy chain in the U.S. has faced a raft of issues including massive debt needed to fund the $69 billion purchase of Aetna insurance in 2018, expansion into HealthHub healthcare services stores, and even investigations over prescription errors. 

Competition from other pharmacy chains is fierce. However, the worst is yet to come. Amazon launched Amazon Pharmacy delivery service for prescription medications last November. Amazon’s pharmacy ambitions are a huge threat. The market recognizes that — CVS stock dropped 8.6% on the day Amazon made the announcement. 

Home Depot (HD)

On the surface, these seem like great times for Home Depot. When people were in lockdown during the pandemic, many of them turned to home improvement. That made Home Depot a star among retail stocks, with growth of 71% over the past 12 months.

However, look more closely and you see that…

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