Retailers are overhauling their operations as technology redefines the shopping experience. Still, demand can be volatile as the industry is exposed to the ups and downs of consumer spending. This has stirred some uncertainty lately as retail stocks have tumbled by 3.6% over the past six months. This drawdown is a noticeable divergence from the S&P 500’s 7.1% return.

Investors should tread carefully as many companies in this space can be value traps. Keeping that in mind, here are three consumer stocks that may face trouble.

Floor And Decor (FND)

Market Cap: $8.96 billion

Operating large, warehouse-style stores, Floor & Decor (NYSE: FND) is a specialty retailer that specializes in hard flooring surfaces for the home such as tiles, hardwood, stone, and laminates.

Why Are We Cautious About FND?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Smaller revenue base of $4.52 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging

Floor And Decor is trading at $83.29 per share, or 39.8x forward P/E. To fully understand why you should be careful with FND, check out our full research report (it’s free).

Home Depot (HD)

Market Cap: $368.2 billion

Founded and headquartered in Atlanta, Georgia, Home Depot (NYSE: HD) is a home improvement retailer that sells everything from tools to building materials to appliances.

Why Does HD Worry Us?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Estimated sales growth of 1.6% for the next 12 months implies demand will slow from its six-year trend
3. Free cash flow margin dropped by 2.5 percentage points over the last year, implying the company became more capital intensive as competition picked up

Home Depot’s stock price of $370 implies a valuation ratio of 24.1x forward P/E. Read our free research report to see why you should think twice about including HD in your portfolio.

Williams-Sonoma (WSM)

Market Cap: $21.5 billion

Started in 1956 as a store specializing in French cookware, Williams-Sonoma (NYSE: WSM) is a specialty retailer of higher-end kitchenware, home goods, and furniture.

Why Do We Think Twice About WSM?

1. Recent store closures and weak same-store sales point to soft demand and an operational restructuring
2. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
3. 5.3 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position

At $174.82 per share, Williams-Sonoma trades at 20.5x forward P/E. Dive into our free research report to see why there are better opportunities than WSM.

Stocks We Like More

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