Retailers are adapting their business models as technology changes how people shop. Still, secular trends are working against their favor as e-commerce continues to take share from brick and mortars. This puts retail stocks in a tough spot, and over the past six months, the industry has pulled back by 14%. This performance was worse than the S&P 500’s 5.8% fall.
Investors should tread carefully as many companies in this space can be value traps. Keeping that in mind, here are three consumer stocks we’re steering clear of.
Burlington (BURL)
Market Cap: $15.68 billion
Founded in 1972 as a discount coat and outerwear retailer, Burlington Stores (NYSE: BURL) is now an off-price retailer that has broadened into general apparel, footwear, and home goods.
Why Do We Think Twice About BURL?
- Scale is a double-edged sword because it limits the company's growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 7.9% for the last five years
- Free cash flow margin dropped by 4 percentage points over the last year, implying the company became more capital intensive as competition picked up
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $249 per share, Burlington trades at 26.5x forward P/E. If you’re considering BURL for your portfolio, see our FREE research report to learn more.
GameStop (GME)
Market Cap: $11.98 billion
Drawing gaming fans with demo units set up with the latest releases, GameStop (NYSE: GME) sells new and used video games, consoles, and accessories, as well as pop culture merchandise.
Why Should You Dump GME?
- Sales tumbled by 10% annually over the last five years, showing consumer trends are working against its favor
- Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability
- Push for growth has led to negative returns on capital, signaling value destruction
GameStop’s stock price of $26.78 implies a valuation ratio of 3.2x forward price-to-sales. Check out our free in-depth research report to learn more about why GME doesn’t pass our bar.
Academy Sports (ASO)
Market Cap: $2.68 billion
Founded in 1938 as a tire shop before expanding into fishing equipment, Academy Sports & Outdoor (NASDAQ: ASO) sells a broad selection of sporting goods but is still known for its outdoor activity merchandise.
Why Is ASO Not Exciting?
- 4.2% annual revenue growth over the last five years was slower than its consumer retail peers
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Efficiency has decreased over the last year as its operating margin fell by 1.9 percentage points
Academy Sports is trading at $39.50 per share, or 6.1x forward P/E. To fully understand why you should be careful with ASO, check out our full research report (it’s free).
Stocks We Like More
Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.
While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.
