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2 Retail Stocks Below $10 to Avoid in 2019

Statistics Canada released its retail trade numbers for August 2018 on October 19. Retail sales dropped 0.1% to $50.8 billion in August after a 0.2% rise in July. The 2% decline in sales at gasoline stations was largely behind the retreat. Gas prices have dropped precipitously in the months since, which has the potential to offset the usual gains in retail sales in the holiday months.

Clothing and clothing accessories stores experienced a 1.2% drop in activity from July to August. Clothing retailers have posted 3.2% growth year over year. Today we are going to look at two Canadian retailers that have struggled mightily in 2018. It may be enticing to buy on the dip in late 2018, but investors may want to think twice before exploring this option. Let’s explore why.

Roots (TSX:ROOT)

Roots stock has suffered a steady decline since it reached an all-time high of $13.55 in early May. Shares are down over 65% since the peak. The stock has shed another 23% over the past month as of close on November 22. Back in late October, I’d warned investors to stay away from Roots. The stock sits at $4.40 as of close on November 22.

Roots released its second-quarter results on September 12. Adjusted EBITDA fell to $32,000 compared to $1.3 million in the prior year. Basic loss per share also grew to $0.10 per share over $0.08 per share in the second quarter of 2017.

President and CEO Jim Gabel conceded that negative store traffic was a concern heading into the third quarter, while on the positive end Roots did post improvements in its e-commerce business. Still, this trend has emerged across all sectors in retail. Retail e-commerce sales experienced 13.9% growth across Canada from August 2017 to August 2018.

Hudson’s Bay (TSX:HBC)

Hudson’s Bay stock had dropped 31.3% in 2018 as of close on November 22. Shares have plunged over 60% over a three-year span. The company has been mired in an internal battle that has pitted management against shareholders over the future of the company. Land and Buildings Investment Management has pushed for the company to monetize its real estate holdings and gradually scale back retail operations. The departure of retail veteran Jerry Storch as CEO seemed to signal that this faction had won the battle.

Hudson’s Bay reported a second-quarter loss of $147 million in early September, worse than the $100 million loss posted in the prior year. Comparable sales in its department store group fell 3.8%, and sales at Saks OFF 5th dropped 7.6%. The company has moved to sell at least 10 more Lord & Taylor stores, including its Manhattan flagship to Softbank-based WeWork Cos. in 2017.

Hudson’s Bay is in dangerous territory as we look ahead to 2019, and economic headwinds could deal even more damage to retailers in the coming quarters. Both of these stocks are too volatile to touch even at present-day low prices.

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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.

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