Consumer discretionary businesses are levered to the highs and lows of economic cycles. Lately, it seems like demand trends have worked in their favor as the industry has returned 31.9% over the past six months, outpacing S&P 500 by 9 percentage points.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks we’re steering clear of.
Wynn Resorts (WYNN)
Market Cap: $12.93 billion
Founded by the former Mirage Resorts CEO, Wynn Resorts (NASDAQ: WYNN) is a global developer and operator of high-end hotels and casinos, known for its luxurious properties and premium guest services.
Why Are We Wary of WYNN?
- Lackluster 9.9% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $125.98 per share, Wynn Resorts trades at 24.4x forward P/E. Read our free research report to see why you should think twice about including WYNN in your portfolio.
Xponential Fitness (XPOF)
Market Cap: $245 million
Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE: XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.
Why Are We Out on XPOF?
- Muted 5.8% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Poor expense management has led to operating margin losses
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Xponential Fitness’s stock price of $6.98 implies a valuation ratio of 8x forward P/E. If you’re considering XPOF for your portfolio, see our FREE research report to learn more.
1-800-FLOWERS (FLWS)
Market Cap: $309.8 million
Founded in 1976, 1-800-FLOWERS (NASDAQ: FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.
Why Is FLWS Risky?
- Sales tumbled by 8.6% annually over the last two years, showing consumer trends are working against its favor
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
1-800-FLOWERS is trading at $4.80 per share, or 14.6x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than FLWS.
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