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Warning: 2 Stocks I’m Avoiding in 2020

The past decade has seen many top retailers face unprecedented challenges. Many brick-and-mortar retailers have committed to a tactical retreat as foot traffic has broadly declined.

Consumers, particularly younger demographics, have migrated to online shopping. This phenomenon has been dubbed the “retail apocalypse” by some.

This is not to say that retail is on death’s door, however — quite the opposite, in fact. Retailers who have been able to adapt to the changing environment will be capable of thriving in the long term. Take Canada Goose as an example.

The high-end winter clothing manufacturer and retailer has handled its expansion intelligently. Canada Goose has put significant focus on its online offerings, and it has limited itself to a handful of large store openings in metropolitan areas.

Other retailers are struggling with this adjustment. Today I want to look at two retail stocks that have been hammered in 2019. The beginning of the next decade will be huge for both companies. I’m steering clear of both equities right now. Let’s explore why.

Roots

Roots (TSX:ROOT) was founded in 1973, and has evolved into one of Canada’s top apparel, footwear, and leather goods brands. This has failed to translate into success on the TSX since its initial public offering in October 2017.

Roots’ IPO was a dud, but the stock managed to gain some traction in the fall of 2018. Since then, however, it has steadily declined.

Shares of Roots have plunged 25% in 2019 as of close on September 17. It released its fiscal 2019 second-quarter results on September 11. Roots posted a $9.7 million loss, which fell short of expectations.

This amounted to a loss of $0.23 per share compared to a $0.10 per share loss in Q2 fiscal 2018. Comparable sales fell 2.9% year-over-year as Roots suffered from a decline in foot traffic and a delay in the flow of product.

The company is touting the back-to-school season ahead of its next quarter, but Roots is a dicey proposition right now. Shares possess a sky-high price-to-earnings ratio of 59.

The stock has plunged into technically oversold territory, but this technical buy signal is not enough for me to want to pull the trigger today.

Indigo Books & Music

Indigo Books & Music (TSX:IDG) is Canada’s largest book, gift, and specialty toy retailer. Big box bookstores swept away smaller competition at the end of the 20th century, but the emergence of Amazon has put these retailers in a similar position. Indigo has sought to adapt to this new environment, but progress has been slow.

Back in mid-August I’d discussed why Indigo is facing an uphill battle in the coming quarters, suggesting that investors steer clear of the stock after its post-earnings dip.

Indigo posted a comparable sales decline of 7.6% in the second quarter of fiscal 2020, which included online and comparable store sales. Shares have dropped 17% month-over-month as of close on September 17.

Amazon has a stranglehold in this sector as more and more consumers shift to online shopping. Canadian consumers have trailed behind their U.S. counterparts in adopting this trend, but the last few years have shown that they are catching up.

I don’t believe that Indigo’s revamps and push into e-commerce will be enough to make up ground against its top competition in the next decade, so I’m passing on the stock in 2019.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

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