Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand trends may be working against their favor as the industry’s returns were flat while the S&P 500 was up 6.4%.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks we’re steering clear of.
Caleres (CAL)
Market Cap: $495.8 million
The owner of Dr. Scholl's, Caleres (NYSE: CAL) is a footwear company offering a range of styles.
Why Is CAL Risky?
- Annual revenue declines of 3.8% over the last two years indicate problems with its market positioning
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Caleres is trading at $14.67 per share, or 4.8x forward P/E. If you’re considering CAL for your portfolio, see our FREE research report to learn more.
Steven Madden (SHOO)
Market Cap: $1.93 billion
As seen in the infamous Wolf of Wall Street movie, Steven Madden (NASDAQ: SHOO) is a fashion brand famous for its trendy and innovative footwear, appealing to a young and style-conscious audience.
Why Are We Cautious About SHOO?
- Muted 9.4% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 7.9% for the last two years
- Waning returns on capital imply its previous profit engines are losing steam
At $26.33 per share, Steven Madden trades at 16.1x forward P/E. To fully understand why you should be careful with SHOO, check out our full research report (it’s free).
Sphere Entertainment (SPHR)
Market Cap: $1.44 billion
Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE: SPHR) hosts live entertainment events and distributes content across various media platforms.
Why Do We Avoid SPHR?
- Sales trends were unexciting over the last five years as its 7.6% annual growth was below the typical consumer discretionary company
- Cash-burning history makes us doubt the long-term viability of its business model
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Sphere Entertainment’s stock price of $40.01 implies a valuation ratio of 8.8x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than SPHR.
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