Retailers are evolving to meet the expectations of modern, tech-savvy shoppers. This includes developing an online presence to fend off e-commerce competitors, a strategy that has helped the industry maintain steady demand by giving it more sales channels. In turn, retail stocks were up 20.9% over the past six months compared to 17.4% for the S&P 500.

Regardless of these results, a cautious approach is imperative as many companies in this space can be value traps. On that note, here are three consumer stocks we’re swiping left on.

Grocery Outlet (GO)

Market Cap: $1.72 billion

Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ: GO) is a discount grocery store chain that offers substantial discounts on name-brand products.

Why Do We Think Twice About GO?

1. Operating margin of 1.4% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
2. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

At $17.54 per share, Grocery Outlet trades at 21.5x forward P/E. Check out our free in-depth research report to learn more about why GO doesn’t pass our bar.

Genuine Parts (GPC)

Market Cap: $19.4 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 Not Exciting?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 4.7% over the last six years was below our standards for the consumer retail sector
2. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
3. 3.4 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position

Genuine Parts’s stock price of $139.49 implies a valuation ratio of 17.1x forward P/E. If you’re considering GPC for your portfolio, see our FREE research report to learn more.

Leslie's (LESL)

Market Cap: $61.99 million

Named after founder Philip Leslie, who established the company in 1963, Leslie’s (NASDAQ: LESL) is a retailer that sells pool and spa supplies, equipment, and maintenance services.

Why Is LESL Risky?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. 8.9 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Leslie's is trading at $0.34 per share, or 0.7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why LESL doesn’t pass our bar.

Stocks We Like More

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