Over the last six months, OneWater’s shares have sunk to $15.96, producing a disappointing 10.5% loss - a stark contrast to the S&P 500’s 16.2% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in OneWater, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is OneWater Not Exciting?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid ONEW and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

OneWater’s demand has been shrinking over the last two years as its same-store sales have averaged 1.1% annual declines.

2. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

OneWater has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 24.2% gross margin over the last two years. That means OneWater paid its suppliers a lot of money ($75.77 for every $100 in revenue) to run its business.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

OneWater’s $554.4 million of debt exceeds the $70.15 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $60.46 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. OneWater could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope OneWater can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

OneWater isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 11.1× forward P/E (or $15.96 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.

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