Retailers are evolving to meet the expectations of modern, tech-savvy shoppers. One initiative that has proven effective is the expansion into e-commerce, which has helped the industry sustain its same-store sales growth and keep pace with the S&P 500’s 6.2% return over the past six months.
Although these companies have produced results lately, investors must be mindful as many companies in this space face structural headwinds. Taking that into account, here are three consumer stocks we’re passing on.
RH (RH)
Market Cap: $3.01 billion
Formerly known as Restoration Hardware, RH (NYSE: RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.
Why Does RH Give Us Pause?
- Sales were flat over the last three years, indicating it’s failed to expand its business
- Earnings per share have contracted by 39.2% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital on unfavorable terms if market conditions deteriorate
RH’s stock price of $160 implies a valuation ratio of 24.9x forward P/E. To fully understand why you should be careful with RH, check out our full research report (it’s free).
Genuine Parts (GPC)
Market Cap: $14.07 billion
Largely targeting the professional customer, Genuine Parts (NYSE: GPC) sells auto and industrial parts such as batteries, belts, bearings, and machine fluids.
Why Is GPC Risky?
- Annual sales growth of 3.1% over the last three years lagged behind its consumer retail peers as its large revenue base made it difficult to generate incremental demand
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Operating margin of 4.5% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
Genuine Parts is trading at $112.99 per share, or 14x forward P/E. Dive into our free research report to see why there are better opportunities than GPC.
Petco (WOOF)
Market Cap: $808.1 million
Historically known for its window displays of pets for sale or adoption, Petco (NASDAQ: WOOF) is a specialty retailer of pet food and supplies as well as a provider of services such as wellness checks and grooming.
Why Are We Out on WOOF?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Earnings per share fell by 34.5% annually over the last three years while its revenue was flat, partly because it diluted shareholders
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $2.62 per share, Petco trades at 11x forward P/E. If you’re considering WOOF for your portfolio, see our FREE research report to learn more.
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