Retailers are evolving to meet the expectations of modern, tech-savvy shoppers. But many seem to be moving too slowly as their demand is lagging, causing the industry to underperform the market - over the past six months, retail stocks' 2.5% return has fallen short of the S&P 500’s 4.5% gain.
While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three consumer stocks that may face trouble.
Zumiez (ZUMZ)
Market Cap: $423.7 million
With store associates called “Zumiez Stash Members”, Zumiez (NASDAQ: ZUMZ) is a specialty retailer of street and skate apparel, footwear, and accessories.
Why Should You Dump ZUMZ?
- Recent store closures reflect a shift toward streamlining existing locations to maximize efficiency
- Revenue base of $929.1 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- ROIC of 3.1% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
Zumiez is trading at $24.98 per share, or 26x forward P/E. Dive into our free research report to see why there are better opportunities than ZUMZ.
Arhaus (ARHS)
Market Cap: $1.10 billion
With an aesthetic that features natural materials such as reclaimed wood, Arhaus (NASDAQ: ARHS) is a high-end furniture retailer that sells everything from sofas to rugs to bookcases.
Why Are We Cautious About ARHS?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Modest revenue base of $1.38 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Revenue growth over the past three years was nullified by the company’s new share issuances as its earnings per share fell by 22% annually
At $7.80 per share, Arhaus trades at 15.3x forward P/E. If you’re considering ARHS for your portfolio, see our FREE research report to learn more.
Sally Beauty (SBH)
Market Cap: $1.41 billion
Catering to both everyday consumers as well as salon professionals, Sally Beauty (NYSE: SBH) is a retailer that sells salon-quality beauty products such as makeup and haircare products.
Why Do We Think SBH Will Underperform?
- Lack of new stores suggest it’s attempting to increase revenue at existing locations because demand is sluggish
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Modest revenue base of $3.71 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
Sally Beauty’s stock price of $14.50 implies a valuation ratio of 6.5x forward P/E. Read our free research report to see why you should think twice about including SBH in your portfolio.
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