Retail Stocks Investors Abandoned May Be Crippled for Good

Investors walked away from several retail stocks late this year. Those companies probably will continue to falter in 2012 and 2013.

Best Buy (NYSE: BBY), Gap (NYSE: GPS) and Sears Holdings (NASDAQ: SHLD) shares sold down sharply in the fourth quarter. Shares of Walmart (NYSE: WMT), JCPenney (NYSE: JCP) and Macy’s (NYSE: M), though, remained steady or gained. This despite the fact that these three are threaten nearly as much as other bricks-and-mortar retailers are as e-commerce becomes a larger part of the retail market.

Concerns about the three weak retailer stocks are very specific.

Best Buy has been unable to thwart Amazon.com’s (NASDAQ: AMZN) rapid expansion into consumer electronics and digital content. These businesses are now nearly as strong as the e-book and print book businesses are for the largest e-commerce company in the world. Like Barnes & Noble (NYSE: BKS), Best Buy failed to create a web presence or online price model that would allow it to defend itself against Amazon.

Sears Holding’s problems are largely different from those of Best Buy. Kmart and Sears stores have not changed much in the past five years. The parent has elected not to commit the capital to upgrade its locations. Sears might have done better if its stores were freshened like those owned by Walmart, Macy’s and Target (NYSE: TGT). Sears management has witnessed how being cheap can get expensive when customer retention is at stake.

The reasons for the failure at Gap fall into another category. The retailer had the instinct to remain on the leading edge of mid-priced fashion. It lost that edge two or three years ago for reasons that are unclear. Gap has been overwhelmed since then by the success of smaller retailers like Abercrombie & Fitch (NYSE: ANF).

The retail industry, like most others, will lose some of its largest companies over the next few years. Best Buy, Sears and Gap are likely to be among them.

Douglas A. McIntyre