Retailers are overhauling their operations as technology redefines the shopping experience. 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 22.7% over the past six months compared to 16.8% for the S&P 500.
Although these companies have produced results lately, investors must be mindful as many companies in this space face structural headwinds. With that said, here are three consumer stocks we’re swiping left on.
Victoria's Secret (VSCO)
Market Cap: $2.21 billion
Spun off from L Brands in 2020, Victoria’s Secret (NYSE: VSCO) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.
Why Should You Sell VSCO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Subpar operating margin of 4.5% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Earnings per share have contracted by 23.9% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Victoria's Secret is trading at $27.45 per share, or 14.8x forward P/E. To fully understand why you should be careful with VSCO, check out our full research report (it’s free).
Shoe Carnival (SCVL)
Market Cap: $621.6 million
Known for its playful atmosphere that features carnival elements, Shoe Carnival (NASDAQ: SCVL) is a retailer that sells footwear from mainstream brands for the entire family.
Why Do We Steer Clear of SCVL?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Revenue base of $1.15 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- 6 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 $22.80 per share, Shoe Carnival trades at 14x forward EV-to-EBITDA. If you’re considering SCVL for your portfolio, see our FREE research report to learn more.
Sally Beauty (SBH)
Market Cap: $1.54 billion
Catering to both everyday consumers as well as salon professionals, Sally Beauty (NYSE: SBH) is a retailer that sells salon-quality beauty products such as makeup and haircare products.
Why Do We Think SBH Will Underperform?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Revenue base of $3.69 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Earnings per share have dipped by 2.7% annually over the past six years, which is concerning because stock prices follow EPS over the long term
Sally Beauty’s stock price of $15.56 implies a valuation ratio of 8.2x forward P/E. Dive into our free research report to see why there are better opportunities than SBH.
Stocks We Like More
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